It’s Groundhog Day again as markets wake up and dust themselves off after taking another bruising from a big sell-off in the price of oil. There has even been a little Chinese yuan depreciation thrown in for good measure.
On Wednesday, European stocks look set to open lower, continuing the difficulty as oil and Chinese shares continue to slide overnight.
There could, however, be some scope for relief. Despite the prominent headwinds on display on Tuesday, stocks and oil are still holding above recent lows.
The failure to materially push beneath the January lows has given investors greater confidence to participate in a possible recovery. The ongoing strength in gold and the Japanese yen says that a lot of the bullish participation in equities is being hedged.
US and UK stocks appear to be leading the charge steered by resource sectors, while Europe is playing a bit of catch-up after the banking sell-off two weeks ago.
Choppy oil prices are likely to keep markets on edge as the effectiveness of a Russian-Saudi output freeze gets priced out. The only good thing about the production freeze was that it could be prelude to a cut, so Saudi oil minister al-Naimi saying there won’t be a cut has kicked the legs out from under oil market. The public spat between Iranian and Saudi oil ministers says it all. With relations between two of the biggest oil producers this bad, the Russian oil minister’s suggestion of a 5% production cut is dead on arrival.
BOE governor Mark Carney did little to garner confidence about the consequences of a Brexit on the UK economy as the pound dipped again to fresh lows during inflation hearings. The discussion at the hearings was supposed to be about UK inflation, but that got understandably sidelined by Brexit and the Boris-effect.
On Tuesday gilts fell slightly and it’s worth noting that 124 on the UK 10-Year, just above current levels, has capped bounces in the price three times since 2011. With even a faint Brexit risk, it might be understandable to jump into European debt ahead of an expansion in asset purchases from the ECB next month or US debt to earn a decent yield.
EUR/USD – The euro was trapped between the 1.10 level and the 200 DMA on Tuesday. Just beneath, 1.0980 was resistance from December 22 to January 28 is an additional layer support. The spinning top formation denotes indecision at key support.
GBP/USD – Sterling again on Tuesday to make a near seven-year low just above 1.40. There is still scope for a weekly reversal to create a fakeout beneath the previous low, but the lower daily close increases the odds that the downtrend can continue to 1.35, the 2009 low.
EUR/GBP – The euro-pound closed above 0.78 for the third time since February 9. The sideways movement looks more akin to a bullish consolidation than a precursor to a bigger drop.
USD/JPY – Dollar-yen has slipped back beneath 112 and may need another run at the February 11 low before any rebound is possible. If the rebound does happen, it could target the former 1-year support at 116.
Equity market calls
FTSE100: to open 29 points lower at 5,933
DAX: to open 48 points lower at 9,372
CAC40: to open 22 points lower at 4,216
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