Market News & Insights
12 February 2018

Taking Stock of the “Crash”

Last week’s market correction has certainly not gone away and while volatility remains elevated the chance of further declines remains very much alive, especially as we’ve yet to see any real recovery from the sell-off. We have to highlight that despite the declines being sizable and fast, it was certainly not a “crash” of dangerous proportions, it was not an indication of a major systematic risk or anything else aside from markets perhaps looking to adapt to the reality that central banks will be raising rates and moving away from large scale easing and that equity markets cannot continue to soar higher without a correction.

It’s been a long time coming, over two years ago former Fed Chair Janet Yellen said that equity market valuations were stretched and there are those out there that will argue these corrections are healthy. The risk is the speed things change now, not the correction itself. Sometime the shift happens faster than most can react and this is where the risk is created. Currency markets were less exposed to the huge volatility we saw last week but there were still some very interesting movements and hedging is back on many people’s agenda.

GBP went full circle, a rally of almost 1.5% on Thursday following a more hawkish BOE suggesting rates would rise sooner and faster than initially guided, before a complete about turn on Friday when sterling pairs gave back all their gains and then some. GBPUSD down almost 2.5% last week while GBPEUR was down close to .5%. Certainly not what the BOE would have wanted to see when they decided to become so hawkish. There was no much in the way of hard data driving the sell off in GBP, some weak trade balance figures didn’t help but the bulk of the selling was on the back of Brexit headlines as Michel Barnier highlighted the transition period was “not a given” especially if disagreements persists. And they almost certainly will as trade deals, single market access during transition period, Irish boarder talks and the litany of other issues we’ve debated over the last 1.5 years.

Today we have some comments from the BOE’s Ian McCafferty and Gertjan Vlieghe, CPI inflation data will be the big kicker this week for the pound (data wise) with retail sales backing up the week on Friday. Like the broken record I am however, I will state it again, GBP direction will be guided solely on Brexit sentiment and headlines. Anything else like tomorrow’s CPI reading is just intraday volatility.

The USD index is up over 2% in February, bouncing off lows as the US continues to press for 3 rate hikes this year, US yields continue to rise and on Friday an agreement on the US budget which would add some $320bln to the US deficit was agreed. Exact details are still to be negotiated and a stop gap is in place until March 23rd. There’s really not too much to sink our teeth into for the USD until Wednesday and that could well see the USD give back some of last week’s gains, nothing major in terms of USD selling would be expected but some profit taking could see a move slightly lower in the USD. CPI inflation on Wednesday is the pick of the week’s data from the US.

The euro has been interesting also. We saw a huge volume of euro selling through the early part of last week and market chatter was suggesting there was major profit taking on euro long positions. The question now is, does that mean the euro has gone as high as it can and are we expecting a larger correction? EURUSD would suggest that is very possible but technically we still remain in the uptrend, only a break back below sub 1.2180 area would suggest larger declines, but a move sub 1.2000 is where I’d expect the market to really get jittery and thus see larger euro selling. As it stands, the ECB have remained bullish on the economy, if not hawkish on rates and it currently appears QE will continue into December at least, an indication the ECB will go further that this will almost certainly see the euro weaker.

The major sticking point for the euro and the ECB continues to be inflation and as this remains subdued, the ECB’s hands are tied. We have a large number of ECB speakers from Wednesday onwards that will be our main focus this week for the euro.