Raining Stocks?

It appears that Mondays are becoming one of the busier days of the week in the financial markets at present, so much for the old saying regarding a quiet Monday at the office. Over the past few Mondays we have had to deal with unexpected political unrest in Hong Kong, and widespread greenback profit taking reflecting anxiety of a dovish FOMC Minutes release, followed by yesterday’s continued stock market sell-off. Next week, China’s scheduled GDP release may well continue the pattern of Monday volatility with a specialist economic forecasting business in London, Now-Casting Economics, estimating China’s GDP will be announced at 6.8%. If this proves accurate, it will be far below Beijing’s 7.5% target and will support fears over global economic growth – likely sparking more stock selling. Yesterday the “fire sale” in Wall Street continued with the S&P 500 slipping as low as 1880 overnight. The S&P 500 has now experienced its worst three-day decline since November 2011, dropping around 90 points. I was expecting the S&P 500 to be valued around 1920 when the Federal Reserve concluded QE in October, but this acceleration in stocks has surprised. I don’t think the recent drop in US stocks is the beginning of the correction period quite yet, but fears over the global recovery following an economic downgrade from the IMF has heavily encouraged investors to take profit on their positions.

A reduced quantity of economic data from both the EU and the United States resulted in EUR/USD appreciation, with the EUR/USD unexpectedly trading as high as 1.2760 on Monday. Saying that, the EU economic sentiment remains bleak and the latest German ZEW Survey is released this morning. If the survey continues to reflect that German business confidence is low right now, while adding further fuel to the fire that Germany is entering another recession, I expect the pair to fall straight back down to 1.26.

The Cable traded narrowly on Monday with the main focus being Bank of England (BoE) Governor, Mark Carney expressing those recent Eurozone economic problems will not dictate when the BoE raises interest rates. A recent Manufacturing PMI announcement that missed expectations due to reduced demand in the Eurozone really softened investor appetite towards the GBP, worrying investors that EU problems would impact UK sector growth. The BoE had previously warned UK economic growth would slow slightly in Q3 and the recent disappointing Manufacturing PMI and Construction Output reflects those forecasts.

To be honest, the GBP/USD is really struggling to find any direction at the moment and seems to be alternating between both a bullish and bearish sentiment. Business Secretary Vince Cable attracted attention last week for suggesting that the GBP was overvalued by at least 10% with this impacting UK inflation levels. Later this morning, it is expected that UK CPI will slow down to 1.4%, way below the BoE’s threshold CPI target of 2% to consider a rate increase. Confirmation of this should signal to investors that although the BoE appear to remain on track to raise rates in Spring, they are under no pressure to raise rates any sooner. As a result, it would not surprise if the Cable drops to 1.59 later today.

In line with expectations, the USD/JPY pullback continued with the pair falling as low as 106.774 overnight. The pair has now dropped 320 pips since failing to surpass resistance at 110.275. The Bank of Japan (BoJ) leaving monetary policy unchanged again and indications of safe-haven attraction following economic downgrades has resulted in JPY strength. On the other hand, the lack of a hawkish comment from the FOMC Minutes release seems to have put the handbrake on the Greenback rally.

Although the Federal Reserve will conclude QE in just over a fortnight, if the Fed continue to refuse to drop a hint regarding when it could raise rates and JPY strength remains consistent, this pair can conclude October at 105.


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