If investors were hoping for signs of a let up in the wave of selling seen in recent days, today may well provide it, despite a volatile US session as Asia markets look to steady themselves though the Chinese market continues to remain under pressure.
Despite this prospect of further losses seems highly probable unless we get a material change in sentiment over the next few days, or commodity prices show signs of finding a base.
Investors will certainly be looking in Beijing’s direction to see how long it takes for Chinese authorities to take further action to support either the economy or the market.
While the moves in recent days have been quite alarming in their volatility when one looks back at the performance of stock markets over the last six years, perhaps the recent declines are long overdue.
For the last six years investors have been spoilt by central bankers who have been extraordinarily successful in pushing stock markets to record highs with the use of large scale loose monetary policy, while the Chinese economy has been growing at a fairly decent clip.
This steady growth was almost an unspoken truth until the middle part of this year as attempts by the Chinese central bank to stimulate a recovery in its own economic slowdown ran into the combined efforts of the Bank of Japan and the European Central Bank, whose policies have weakened their own currencies against the Chinese Yuan, and in the process eroded China’s competitiveness.
In seeking to nudge its currency lower Chinese authorities appear to have triggered widespread concerns that all is not as well as previously thought with the world’s second biggest economy, and in the process triggered a widespread reassessment of valuations in some of the most sensitive sectors to the business and commodity cycle.
This in turn triggered a sell-off in Chinese equity markets on concerns about over optimistic valuations, which in turn triggered a host of margin calls from investors who had borrowed money to purchase equities. These concerns about Chinese growth have in turn prompted a similar reassessment of other global equity markets and similarly respective elevated valuations.
With US margin debt also at record highs, last week’s and yesterday’s falls in the US have triggered similar reassessments, which in turn have prompted a similar vicious wave of selling, which could well trigger further losses in the coming days.
A good number of technology stocks are still trading at eye watering valuations, and could well fall much further, while mining stocks have also been sold heavily with some falling below their 2008 lows, as concerns grow that commodity prices haven’t yet hit a near term bottom.
While the FTSE100 has hit levels last seen in 2012 given its heavy weighting to basic resource/oil and gas stocks the FTSE250 is still well above its 2014 lows, despite losing over 1,000 points in the last two days.
It is also important to put these declines in somewhat of a context. Since 2009 the FTSE100 is still up over 50%, the DAX is up 150% and the Nasdaq is up 250%, and in all that time we probably haven’t seen a significant correction of 20% or more, though we did see some heavy falls in 2011.
Against this sort of backdrop it is hard to envisage the possibility the Federal Reserve would go through with any intention to hike interest rates next month, a view more or less acknowledged by FOMC hawk Dennis Lockhart in comments late yesterday when he stated that he still expected a normalisation of monetary policy, “sometime this year.”
His imprecision about the timing of such a move, given his comments earlier this month, would appear to suggest that he may be moving away from his earlier view of this month, and that the bar may well have moved enough to defer his decision.
This view does appear to be in evidence in the currency and bond markets where the US dollar has been crushed against the euro and Japanese yen as bond yields slid back sharply. The greenback did perform better against the commodity currencies of the Norwegian Kronor, as well as the Australian and Canadian dollar, as commodity prices sank to 16 year lows.
On the data front today we have the final Q2 GDP number from Germany which is expected to be confirmed at 0.4%, while the latest German IFO number for August is expected to show a slight weakening from 108 to 107.60.
EURUSD – having broken above the 1.1500 level yesterday we look set to push through towards the 1.1800 level over the next few days. Having broken through the 1.1470 area this is now likely to act as support.
GBPUSD – we finally made it to the 1.5800 area though it was a struggle. A break through 1.5820 could well see a revisit of the June highs at 1.5930. Only a move below the 1.5600 area delays this prospect and argues for a move back towards 1.5530.
EURGBP – yesterday saw us break above the 200 day MA for the first time since October 2013, suggesting that we might see further gains, though we didn’t close above it. This suggests we might see a pullback first towards 0.7230. The next resistance sits at the May highs at 0.7485.
USDJPY – the US dollar briefly went into free fall yesterday touching 116.55 at one point before rebounding. Having broken so strongly below the 120.40 area, which completed a double top formation the prospect of further losses to 115.00 cannot be ruled out, while below the 120.00 area.
Equity market calls
FTSE100 is expected to open 56 points higher at 5,955
DAX is expected to open 207 points higher at 9,855
CAC40 is expected to open 59 points higher at 4,442
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