There’s always a threat in these markets that any day can suddenly shift to risk off with little catalyst. Well that’s not quite true, there are plenty of catalysts and risks lying just under the surface in these markets but for the most part they appear to be discounted or just simply ignored and as such the slow grind higher in favour of riskier assets continues. The rationale for the market to suddenly focus on these underlying risks on any particular day is less clear. Geopolitical tensions across the globe are a concern but they are particularly elevated in some areas meaning the threat of war is not far away on several fronts, in market terms we have the ECB unwilling to remove their stimulus program, while in the UK political fighting within government is creating serious concerns for a market waiting for Brexit terms to be negotiated. In the US the administration continues to run into road black and scandal and for those of us with a cynical view of it all, markets are feel poised for a big drop. All the while however stocks are happy to press record/multi year highs on a monthly basis. So every now and then it is not surprising to have a day like yesterday, where heavy selling dominates the morning session before things steadied up somewhat in the US session.
The risk off environment began in the Asian session yesterday with the Nikkei rallying over 2% before plunging back over 5%. This led to a weaker start in Europe and US stocks were also poised to open down. Sentiment through the European session wasn’t helped by some weaker earnings but by the time the US came to play, the BTFD crowd came out in force and helped US bourses up from the lows to close down around .5% on average (having been more than 1% lower at times). In currency markets GBP found itself under pressures again, most notably against the Euro, concerns in government appear to be the primary catalyst here. The USD also traded lower on the day, with the USD index traded to 2 week lows, down over .5%. The Euro and JPY were both firmer on the day. That sentiment has continued overnight and into this morning with Asian indices mostly in the red with the Nikkei down .82%, while the Chinese CSI300 was actually up almost .9%. Major European indices are all in the red thus far this morning.
GBP has had little luck thus far this week, the pound has struggled for any meaningful traction since last week’s BOE meeting but it appears to be Brexit/political concerns that are weighing on the pound this week. That may change today however as we have some decent data points to focus on with industrial and manufacturing productions data due across the wires, along with trade balance figures and the NIESR GDP estimate. We are expecting to see a slight pickup in industrial production figures and while the pace of manufacturing growth is expected to slow slightly. Give the recent downbeat tone for GBP, anything slightly better than expected will provide some lift to GBP. GBPUSD still remains range bound, 1.3179 capping any move higher for now while 1.3094 offers some support, with 1.3030/50 area providing a more interesting level for GBP buyers. EURGBP stuck in a similar range .8730/50 area has plenty of Euro bids, thus providing support and holding any move lower. While any press higher finds light resistance at .8875/90 area. While .9000 area continues to be the real bull/bear line for EURGBP.