Expectations that we might see some form of further easing from Chinese policymakers over the weekend proved somewhat misplaced despite some massive falls in stock markets last week, though we could well some action in the coming days given this morning’s heavy falls in Asia.
Over the last six years since the 2009 lows we’ve seen some hefty short lived sell-offs interspersed within the slow rise to record highs this year, but nothing like the events of the last few days. These sell-offs have usually been over concerns about a variety of factors including growth slowdowns, the withdrawal of central bank stimulus, as well as political and geopolitical instability, but last week’s bloodbath and this mornings continued sell off in Asia has an altogether different feel to it, coming as it does in conjunction will a plunging oil price, with US WTI crude traded below $40 a barrel for the first time since 2008.
With that the prospect of a return to those 2008 lows at $35 a barrel almost seems inevitable, unless something drastic changes within OPEC, or there is some sort of supply shock, which generates a pullback.
Factor in further uncertainty in Europe as Greece gets set for another election on September 20th, as well as elections in Spain and Portugal coming up before year end as well, and we have a recipe for a big cocktail of uncertainty.
Against that back drop it appears that we are set for further heavy losses in the short term as investors await the next moves from central bankers, though with interest rates already at record lows, there is a risk that these toolboxes we hear so much about could be getting rather depleted.
While it appears this month’s sell-off catalyst was a fairly innocuous and not unreasonable readjustment in the trading band for the Chinese yuan, this particular Chinese butterfly also appears to have triggered a complete turnaround in sentiment and reassessment of stock market valuations across the globe, reinforced with a particularly horrible manufacturing PMI number last week. The resultant sell off has seen tech and mining stocks in particular getting hit the hardest, as investors also mull the prospect of a Federal Reserve rate rise sometime next month.
Not only that, in the space of one week the FTSE100 has taken out every monthly low this year and looks set to open below levels last seen at the end of 2013, and in the process closed below the 200 week MA for the first time since November 2011.
Even the German DAX, which was at one point this year up 25%, has seen all of those gains disappear, as concerns about weaker Chinese growth clobber German export expectations, while US markets are also set to their suffered their biggest losses in over four years.
As we embark on the final full week of August the prospect of further large scale volatility seems almost inevitable as investors look towards Chinese markets in particular for further clues to market direction. Chinese authorities’ attempts to defend the 3,500 barrier in the Shanghai Composite look destined to fail with the break below the 200 day MA at the end of last week, likely to put further downward pressure on stocks.
Against this backdrop it would take an investor with nerves of steel to contemplate dipping back into the market at this point.
This week’s key focus is likely to be on the Federal Reserve’s annual central bank symposium at Jackson Hole, Wyoming which starts Thursday, though we’ll also be getting Q2 GDP data from Germany, the UK and US as well.
EURUSD – last weeks close above the 200 day MA for the first time since June 2014 could well see further gains towards the recent May highs at 1.1470. A break through here could well then target the 1.1800 area. Having broken higher any pullbacks could well see support at the 1.1215/20 area.
GBPUSD – continues to struggle to push much beyond the 1.5730 area, nonetheless the probability of a move towards 1.5820 remains. Only a move below the 1.5600 area delays this prospect and argues for a move back towards 1.5530.
EURGBP – we broke the 0.7180 trend line resistance from the May highs at 0.7180 and could well head towards the 200 day MA at 0.7370. Pullbacks look likely to find some support at 0.7220 as well as the 0.7180 area.
USDJPY – further US dollar weakness seems likely after last week’s break below the 123.00 area. The 120.40 area now looks the next likely target while below the 123.00 area.
Equity market calls:
FTSE100 is expected to open 217 points lower at 5,970
DAX is expected to open 428 points lower at 9,695
CAC40 is expected to open 176 points lower at 4,455
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