FTSE -53 points at 7283
DAX -74 points at 11990
CAC -33 points at 4987
Euro Stoxx -26 points at 3418
The US dollar started the week weaker against all of its G10 counterparts. Donald Trump’s defeat over the health-care replacement plan dented investors’ appetite in the ‘reflation’ trading theme. The US 10-year yields broke below 2.40%, as the DXY (the US dollar index) returned back to the pre-US election levels.
Gold extended gains to $1258, just shy of the closely monitored $1260 level, the 200-day moving average. The retracement in the US yield curve is supportive of a positive breakout above $1260 for a further rise to $1280/1300.
The US stock futures traded in the red in Asia. The Dow Jones (-0.53%), NASDAQ (-0.72%) and the S&P500 futures (-0.73%) hint at a melancholic open in the US on increasing worries regarding President Trump’s ability to realize massive fiscal reforms as promised.
Among the G10 currencies, the yen (+0.92%) gained the most against the greenback. The USD/JPY extended losses to 110.26, after taking out the 110.55 Fibonacci 50% support on post-Trump rally. As such, the US dollar gave back half of gains accumulated during the ‘reflation’ rally against the yen. As we are moving toward the fiscal year end in Japan, it could be just a matter of time before the $110.00 is seriously tested.
Nikkei (-1.49%) and Topix (-1.30%) lost on stronger yen. The volatility on Nikkei stocks rose to two-month highs, reflecting investors’ anxiety regarding the yen appreciation.
Financials stocks (-2.30%) made a deeply bearish start to the week in Tokyo. Mining (-1.56%) and energy stocks (-1.64%) traded under pressure as oil traded flat to negative.
The unscheduled OPEC meeting over the weekend did little to cheer up the bulls in the oil market. Oil producer countries announced to stick to their plan to reduce production and highlighted that the recent price drop was due to the high inventory levels, not to a failure in compliance. It has been said that it may take longer than previous anticipated draining the global supply glut. The production cuts could be extended up to 6 months, according to some producer countries.
Unfortunately, the issue is more complex given that all global players are not up to the same speed. We remind that the sell-off in the oil markets was triggered by record high levels of US oil inventories, which are not meant to fade under the Trump administration, which is longing for less energy dependency for the US. The barrel of WTI traded between $47.75/48.28. Trend and momentum indicators point at a comfortably short market stabilizing within the $47/50 range. A negative breakout should bring the $45 in radar, while a positive getaway should suggest a short-term bullish reversal with solid resistance pre-$55.
In the UK, PM Theresa May will trigger the Article 50 on Wednesday, which will officially start the Britain’s exit process from the European Union. Given that the Brexit is already fully priced in the pound’s value, the GBP-crosses are expected to move on developing news, such as the waning in the US reflation trade and the US dollar, as well as the hawkish shift in the Bank of England’s (BoE) policy expectations. The GBP/USD is trending toward the 1.2565 (minor 76.4% retracement on February – March retreat), before 1.2600 (200-day moving average).
Lack of appetite in mining and energy stocks combined to stronger pound point at a negative FTSE open in London. The FTSE 100 is expected to pressure the 50-day moving average (7275p) on the downside, if broken, could encourage a further sell-off to 7225p (minor 23.6% retracement on Trump rally) before 7191p (February 23th dip).
Across the Channel, German Chancellor Angela Merkel secured her biggest victory in thirteen years in Saarland regional vote. Merkel strengthened her position before the federal election due on September 24th. The EUR/USD tested the 200-day moving average (1.0850). Solid positive momentum hints at a further rise toward 1.0932 (major 61.8% retracement on post-Trump rally) before the 1.10 mark.
The euro strength could bring along a downside correction in the European stock markets. The DAX is set to open below €12'000 in Berlin. The 50-day moving average, €11’835, will be the critical battle field between the mid-term longs and shorts.