USA equities slump, ten year treasury bonds rise to a near four year high, whilst Bank of England governor Mark Carney rescues sterling with his confident testimony

Jan 31 • Morning Roll Call • 1414 Views • Comments Off on USA equities slump, ten year treasury bonds rise to a near four year high, whilst Bank of England governor Mark Carney rescues sterling with his confident testimony

The key U.S. equity market indices; DJIA, SPX and NASDAQ, sold off sharply during Tuesday, after suffering the first sell off in over a month on Monday. The DJIA lost over 400 points at one stage as the intraday low (just above 26,000) was reached. Some context must be attached to the recent fall; taking the SPX as an example and despite the losses posted over the past two days, the 2018 gains are currently 5.5%, whilst the NASDAQ gains are at 7.2% in January. If we look at the gains the DJIA has made over the past 52 weeks it’s circa 35%.

It’s worth noting that in order for a bear market to be called, the accepted consensus is for a 20% reversion from the peak across many indices, a correction would generally be classed as a 10% fall from the peak. The fall in the USA equity markets (across the board) is currently less than 2.5%. It’s important that perspective is maintained with regards to this modest pull back, a position that may reverse during tomorrow’s sessions, once the impact of Trump’s first “state of the union address” has been absorbed and the FOMC reveal their interest rate decision.

Many analysts and market commentators refer to the bond market bubble potentially bursting as a warning signal in relation to the stock market falling significantly; ten year Treasury yields pushed above 2.73% during Tuesday, the highest level witnessed since April 2014. And 3% is often looked upon as the breaking point at which: corporate financing costs would become far more expensive, the equity market would lose its attraction and therefore growth momentum would fade. It must be noted that the FOMC doubled interest rates to 1.5% from 0.75% in 2017, and we’ll begin to discover on Wednesday evening what the Fed committee’s views are in relation to monetary policy during 2018. If interest rates rise significantly in 2018, then the likelihood is that bond market rates will rise further.

The economic calendar releases relevant to the USA concerned consumer confidence, that beat forecast by rising to 125.4 for January, the Case Shiller house price composite 20 reading rose to 6.31% YoY. The U.S. dollar index closed the day out flat, whilst USD failed to make significant gains versus yen, euro and sterling. The DJIA closed down 1.19%, SPX down 0.92%. Gold fell by circa 0.2%, with WTI oil falling to just above $62 per barrel.

Both France’s and the Eurozone’s GDP figures came in on forecast; the E.Z. posted growth YoY of 2.7% and France reached 2.4% YoY. In other economic calendar news Swiss exports rose by 2.8% month on month. Germany’s CPI YoY reading fell to 1.6% in January from 1.7%, whilst Eurozone consumer confidence remained unchanged and on forecast at 1.3%.

In other European news U.K. mortgage approvals fell, whilst consumer credit rose, as did secured borrowing on U.K. dwellings, as to whether or not this rise in borrowing represents confidence, or desperation, is tricky to establish. The U.K. pound had come under pressure during the early part of the European trading session, as the day wore on sterling increased in value versus the majority of its peers, receiving a boost from the confident appearance of BoE governor Mark Carney in front of a treasury select committee. During which he expressed a view that Brexit would be not as damaging to the U.K. economy as previously thought and that with effective monetary policy management any fall out could be easily contained. His soothing words were opportune given that a leaked report suggested that the U.K. may lose up to 8% GDP after Brexit, which caused the FTSE 100 to sell off and caused the earlier morning fall in sterling.

U.S. DOLLAR.

USD/JPY traded in a tight bearish range throughout the day, falling through S1 and registering a 0.4% fall, before recovering to close out down circa 0.1% on the day at 108.7. USD/CHF followed a similar pattern to dollar yen, falling through S1, to then recover ending the day down circa 0.3% at 0.934. USD/CAD whipsawed through a wide range, in the European session the commodity currency pair breached R2, before falling to S1, to close out the day close to the daily pivot point at 1.233, down circa 0.1%.

STERLING

GBP/USD traded in a wide range, recovering from an initial fall through S1, cable recovered to break up through the daily PP to eventually breach R1, ending the day up circa 0.3% at 1.414. GBP/JPY was the sterling base pair that experienced the largest trading range and whipsawing during the day, initially collapsing through S2 to break up through the daily PP, to close up circa 0.3%, above R1 at 153.9.

EURO

EUR/GBP whipsawed through a wide range, initially breaching R1 in the European session, the cross currency pair reversed direction passing through the daily PP to breach S1, printing a daily low of 0.875, closing out at 0.876 down circa 0.2% on the day. EUR/USD also whipsawed in a tight range, falling to S1 before recovering to breach R1, up approx. 0.4%, then giving up some gains to end the day at circa 1.240, up circa 0.2%.

GOLD

XAU/USD oscillated in a tight range with a bias to the downside, falling to S1, rising up through the daily PP, then reversing to once again reach the first level of resistance. Closing out the day at circa 1,334, the precious metal has lost circa 32 points since reaching its 2018 high and three month peak of 1,366 last week.

INDICES SNAPSHOT FOR JANUARY 30th.

• DJIA closed down 1.37%.
• SPX closed down 1.09%.
• FTSE 100 closed down 1.09%.
• DAX closed down 0.95%.
• CAC closed down 0.87%.

KEY ECONOMIC CALENDAR EVENTS FOR JANUARY 31st.

• EUR. German Retail Sales (YoY) (DEC).
• EUR. German Unemployment Claims Rate s.a. (JAN).
• EUR. Euro-Zone Unemployment Rate (DEC).
• EUR. Euro-Zone Consumer Price Index Estimate (YoY) (JAN).
• CAD. Gross Domestic Product (YoY) (NOV).
• USD. FOMC Rate Decision (Upper Bound) (JAN 31).

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