Market News & Insights
9 February 2018

No Traditional Risk Aversion As We Know It

We said yesterday the dust hadn’t settled and while global stocks had started the day looking somewhat positive, there was still an air of caution about. That manifested later in the day with a huge dump of stocks into the US close which saw big declines across indices and a day that had started positive closed down over 4%. The late sell off in the US wasn’t the only surprise, the BOE caught markets off guard with a notably hawkish outlook on rates, revising up growth slightly, inflation revised moderately lower, while expecting rates may raise faster than initially guided. This brings the BOE back in line the broader tightening themes across major Central Banks and in fact now puts them firmly ahead of the ECB. Markets are now pricing in an August rate hike from the BOE, with a 50% chance of a hike in May now also priced in. GBP sold off somewhat after European markets went home, but the surprising shift did see GBP up 1.65% vs the USD and 1.3% vs the euro through the European session, before half those gains were given back.

Things have not got much better in sentiment terms in the Asian session but we are not seeing the standard risk aversion trades. Overnight Chinese stocks sold off over 4% while the Nikkei was down over 3%, and yet we see that USDJPY is trading almost .75% higher. The JPY is traditionally a safe haven in times of stress in the markets, however the yen is weaker against the euro, GBP and USD in the last 18 hours. Gold is also usually a traditional favorite for those looking to avoid market risk. The precious metal is down .5% today and nearly 4% from its Jan highs a little over 2 weeks ago. We are seeing a sea of red across major global indices this morning and news overnight that the US government shutdown is back on the cards after a failure to agree terms means that pressure will likely continue to be to the downside but the safe havens are not attracting investors. Thus far we have seen buyers in equity markets below the 10% drop from highs, we’re trading just above that level for now so not quite correction territory yet despite some spikes lower but volatility is back and that means prudent hedging and risk management for your currency exposures should be the focus of conversation. Central banks are looking to return markets to the new norm, back to being self-sufficient, they are taking away the easy money and it would appear that this is the reaction we are seeing across markets.

Yesterday BOE meeting was the big surprise for currency markets and the rally in sterling pairs reflected this. If anything, most (including us) felt the risk to GBP was that the BOE would be a little more cautious on recovery and policy. Going into yesterday’s meeting there was 35 bps in rate hikes priced into 2018, now markets are closer to 65bps following the BOE’s revision. The MPC voted unanimously to keep rates unchanged, but comments indicating they now see rates rising earlier and faster than they had last November changed the outlook considerably. This was the real driver for the pound but the rally did run out of steam later in the evening and the cynic in me think that this is just the BOE using the stronger GBP to their advantage in their fight against inflation, especially as we’ve seen other central bank adopting a more hawkish stance in recent months. The BOE’s inflation forecasts, while improving, are still above their target and thus they still need to remain reactive.

We’ve some strong UK data points due across the wires this morning. Industrial production, manufacturing production and trade balance data are all expected to have slowed, while NIESR GDP estimate is also expected to have slowed to .5% for three months through Jan. For me, the real outlook for the pound is still hard coded on Brexit progress and despite yesterday’s surprising news, major GBP pairs failed to break out of recent ranges. EURGBP stayed above .9730, bouncing off that support highlighted yesterday, and while our bias for this pair remains lower, it will still require positive progress towards a softer Brexit for the downside of this range to be broken, especially if we are to test the post Brexit vote lows back towards .8300 area. So support remains at .8730, then below at .8685/90 area. While any press towards .8900 will see sellers lined up. GBPUSD holding below 1.4000 after yesterday rally ran out of steam at 1.4066. Downside support towards 1.3920 is light and could easily give way.

There’s really not much else due on the data front to get our interest. Nothing of note from the US or the Eurozone this am thus our real attention will be on the broader action happening in markets and of course stateside this afternoon to see if we see any progress on the US government shutdown.