Risk appetite remained largely non-existent at the start of the new week, with European stocks sharply lower and safe haven Japanese yen higher on Monday morning. Not even a decision by the People’s Bank of China over the weekend to cut lenders’ required reserve ratio by 1 percentage point was enough to soothe investor sentiment.
Equities and other risk-sensitive assets have been hit by a series of events lately including trade disputes, emerging market currency crises and concerns over interest rate hikes in the US as well as tightening of monetary conditions elsewhere.
Italy budget, soft data undermine euro
Meanwhile, Italy’s budget deficit plans have provided additional pressure on European stocks, especially in the banking sector, and the single currency. The euro has not been helped by the fact German industrial production unexpectedly fell 0.3% in August, rather than grow 0.4% as was expected. This marks the third consecutive month-over-month drop in German industrial production, with output declining by 1.3% in July and 0.7% in June. This comes as a closely-watched survey of about 2,800 European investors and analysts fell to its lowest level since June.
The Sentix Investor Confidence, which asks respondents to rate the relative 6-month economic outlook for the Eurozone, declined to 11.4 in October, as expected, from 12.0 in September.
Quiet week for data
Looking ahead, there is nothing on the agenda in the afternoon with both North American nations out on holidays. And for the rest of the week, too, we will only have a handful of potentially market-moving data releases to look forward to. These include, among others, UK GDP and manufacturing production on Wednesday, and European Central Bank’s meeting accounts and US Consumer Price Index (CPI) on Thursday.
Yields in focus
With the economic calendar being fairly quiet this week, the focus will remain on the rising yields, after government bond prices got hammered last week which led to a stock market sell-off. In essence, it is the unwinding of the massive bond buying programmes from major central banks, led by the US where the Federal Reserve is already on a hiking cycle, which is unnerving investors.
If the rally in bond yields is sustained, then we could see more losses for major global indices. Meanwhile the rising yields in developed economies could potentially re-ignite the emerging market currency crisis. This is an additional risk factor for equities that needs to be taken into account.
EUR/JPY breaks trend to drop to key support
The weakness of the euro combined with safe haven flows into the yen has caused the EUR/JPY to slump back to long-term pivotal level around 130.00 this morning. As a result of the latest sell-off, the EUR/JPY has broken its bullish trend line and the 200-day moving average, both around the 130.90/131.00 area. This is now going to be the key area for the bears to defend.
But there was a possibility for a short-term rebound from the 129.80-130.00 support area, which was being tested at the time of writing. Even so, the bears will remain in control for as long as rates remain below the broken trend line now.
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