Markets on Edge

Risk sentiment deteriorated further after my update last Tuesday as it emerged that the US/China trade talks are now in serious danger of breaking down altogether. The fresh US sanctions threatened earlier in the week do actually look like coming into effect later today and now China has threatened to retaliate. Certainly evidence would suggest that the PBOC has already stood by and let the CNY weaken. It also looks like they’ve been absent from the latest US bond auctions too.  

Hardly the right mix for a trade deal anytime soon then is it?So, having now reached this point, the concern for the markets; is how does this all get back onto a more positive footing without one side or the other backing down and losing ‘face’ in the process? Not something that either look capable of quite honestly.

Hence, perhaps unsurprising that the VIX index shot up towards 25 yesterday afternoon, before later backing off into the US close.

Consequently, the JPY emerged with the yellow jumper on the currency front as the dollar lost some ground against the EUR. The commodity currencies all suffered too and the AUDUSD is close to breaking down through technical support around 0.6950, not forgetting there’s still likely stops in place at 0.6900 and below. The RBNZ didn’t help that space either when they endorsed the consensus view and duly lowered their benchmark rate to 1.5% earlier in the week.

The pound has fared less well too with the GBPUSD falling back below 1.3000 yesterday. Granted its still highly pivotal around this level. However, at the same time, the push back above 1.12 on the EURUSD helped the GBPEUR fall back further, dropping back below that 1.1650 level. Previously the price had held above 1.16 and risen to as high as 1.1777 at the end of last week. Well, its now given back all those gains and more as it drops back underneath 1.1600, where it still is as I write this morning.

However, it’s possible that the latest UK GDP revision will have an impact on that a little later this morning, but you’ll be in a better position to judge because by the time you get to read this, that data will have been released. All I can say in advance of that; is that a decent upside revision to UK Q1 growth is expected today. How decent, or not will dictate the next short term swing for the currency.

The USDJPY flirted with key support yesterday after it earlier broke down through the daily cloud chart base at 110.32, falling further to test the weekly cloud base which comes innow at 109.56. A close below this level tonight would surely set up further JPY gains in the days ahead. Naturally its not just the dollar that has suffered here because the JPY has gained across the board, especially versus the GBP and the commodity currencies.

However, its also not just the US/China situation that accounts for those recent JPY gains because the latest developments from North Korea peninsular are also a major concern, as are rising tensions in the Persian Gulf. However, in real terms theJPY, and indeed the wider markets too, are actually quite stable given the potential for all the above to unravel.  

Notwithstanding that, I still cannot buy into equities at the current levels and prefer to continue to sit on my hands and remain in cash, for as long as it takes quite frankly. As I said before; I still have no fear of missing out! However, I will be the first to admit if I do succumb to that emotion.

So, as the week draws to a close the markets are indeed on edge and whilst clearly not jumping over it yet; they are nevertheless, very live to the next significant headline. That could even of course involve some grown-ups getting around the table and reaching a sensible agreement, but as we all know only too well, after a 3year absence of such here, just how difficult that might prove to be.

Important Economic Releases Due Today

10/05- 9.30am UK Q1 GDP Estimate Revision (Expected to be revised higher)

10/05- 1.30pm Canadian April Unemployment Report

10/05- 1.30pm US April CPI Inflation Report