European markets may have enjoyed a brief respite yesterday after recent sharp falls, but yesterday’s plunge on Wall Street overnight will ensure a significantly weaker open this morning.
We’ve heard an awful lot of noise in the last couple of days about this dip being a buying opportunity, just like so many of the previous instances over the last five years. There is a risk that this time could well be different given what we’ve seen play out in the US and in the German DAX over the last few days.
For a start this decline is taking place against a backdrop of a retreating Federal Reserve and the end of QE3 this month, as well as concerns about declining economic growth, and high valuations.
Neither of these is particularly conducive to rising stock markets and with valuations starting to look vulnerable, then it stands to reason that stock markets might well be too, which is probably why the VIX hit its highest levels since June 2012 yesterday as risk aversion took hold.
Today is likely to be particularly important from an earnings point of view for US markets with J P Morgan Chase & Co (NYSE:JPM), Citigroup Inc (NYSE:C), Wells Fargo & Company (NYSE:WFC) and Johnson & Johnson (NYSE:JNJ) all reporting their latest Q3 numbers.
While speculation continues as to what further steps the European Central Bank might take to help boost the recovery in the coming months, today’s economic data in Europe is set to reinforce the doubts about whether the European Central Bank will even be able to follow up on its claims that it can carry out full blown QE, even if it wanted to.
The latest German ZEW economic sentiment survey for October is set to decline further from 6.9 in September to 0, though given recent falls in the DAX it wouldn’t be a surprise if sentiment went into negative territory.
Today in Brussels the European Court of Justice starts its first readings on the legality of the OMT program after the case was referred to it by the German Constitutional Court a few months ago. The German Court declared the program “ultra vires” and the readings could take some time to conclude.
Also in focus today are the latest UK inflation numbers with CPI set to fall further in September from 1.5% in August. Expectations are for a decline to 1.4% while core prices are also set to slip back from 1.9% to 1.8%. Retail prices are also set to fall to 2.3%.
These declines are likely to delay the prospect of any move on interest rates, particularly at a time when some of the recent economic data, particularly on the manufacturing side is starting to slip back.
With everything that is going on in Europe as well, recent comments from Bank of England governor Mark Carney also appear to suggest that the MPC is concerned about events over the other side of the Channel in the same way that last weeks’ Fed minutes, outlined the concerns of US policymakers, about the slowdown in Europe.
These concerns are likely to keep rates until well into next year at the earliest, and with Brent Oil prices also falling to four year lows, the outlook for inflation looks fairly benign for now, reducing the pressure on the Bank of England to think about a hike in rates in the near term.
EURUSD – the euro continues to remain fairly resilient but it still needs to push beyond the 1.2785/90 area which was the previous 61.8% Fibonacci retracement of the 1.2040/1.3995 up move to target a move towards 1.2900. While below 1.2790 the risk remains for a retest of the 1.2570 level. Below 1.2570 argues for a retest of the 1.2500 level and then 1.2400. While last week’s candle was a positive one the signals from it were ambiguous.
GBPUSD – currently struggling to rally with any conviction but while we remains above the 1.6000 level then the risk remains for a rebound back towards last week’s high at the 1.6220/30 level. If we drop back through the 1.6020 level we remain at a risk of a move back towards 1.5950 on the way to 1.5720.
EURGBP – the euro looks as though it might test the main resistance level at 0.7930, after finding support at 0.7850 yesterday. Having managed to push above last week’s high at 0.7900 there is a chance that we could be in for a bit of a short squeeze towards the 0.8000 level. While below the 0.7930 level the risk remains for a move back towards 2012 lows at 0.7754 and last week's lows at 0.7765.
USDJPY – the move towards the 106.20 level looks as if it is starting to unwind after we posted a bearish weekly candle last week. This remains the first stop on the way for a move towards a potential decline towards the 105.60. We need to stay below the 108.50 level for this move to unfold.
Equity market calls
FTSE 100 is expected to open 22 points lower at 6,344
DAX is expected to open 42 points lower at 8,770
CAC 40 is expected to open 20 points lower at 4,058
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