Markets continue to run hot and cold and any recent rallies have proved to be fairly unsustainable. Market liquidity constraints, mixed messages from the Fed, the fall out in the EM space coupled with the lack of clarity on China and now the increasing risk of US government shutdown all playing havoc with investor sentiment. While this is not necessarily a certainty, investors will be wary and likely to remember the previous shut down in respect of the debt ceiling in October 2013. Even amidst QE, the S&P declined some 5% at the time.
Today we witness a U-turn in FTSE movers with the basic resource sector once again falling out of favour with market participants.
The Bloomberg Commodity Index is now at levels last seen in 1999 and UK miners and energy companies are taking the brunt of the pain:
- Shell (NYSE:RDSa) (– 1.31%)
- Anglo American (OTC:AAUKY) (-1.23%)
- Glencore (OTC:GLNCY) (-1.19%)
- Antofagasta (OTC:ANFGY) (-0.95%)
GKN (OTC:GKNLY) has seen a small bounce of 0.7% as it stages a minor recovery in the wake of the VW (OTC:VLKPY) scandal. Shares in the company were already under intense pressure since hitting a high of 389p back in February. Since then a decline of 33% has taken place so it’s really an element of bottom fishing here with few fundamentals to back it. HSBC has a reduced rating on the stock while RBC Capital, JP Morgan and BNP are all fairly bullish on the stock with an average 12-month target price of 363p.
The DAX is trading fairly flat in early trade but will it’s auto sector is likely weigh in the medium term.
Volkswagen has seen some recovery in its share price, up 6% at time of writing, but remains close to levels last seen in 2012. Given that Winterkorn has stepped down, investors look to Friday for news on his replacement.
Rumours that BMW (XETRA:BMWG) has also got some issues in respect of emissions has also sent the share price into decline this morning. It’s presently down 3%.
We call the Dow higher to 16312, but given the recent trends where we have been consistently seeing lower highs over the past month, this is unlikely to be sustained. Durable goods orders and unemployment claims are due later this afternoon. The former is expected to grow 0.2% on the month while claims are expected to climb slightly on the previous week to 268,000.
Appetite In USD At Risk Before US Durable Goods Orders
Appetite in USD is at risk as the durable goods order in the US is expected to have contracted by a significant 2.3% on month to August as the weakness in the energy sector and low export demand in metal and machinery have certainly worsened during August and judging from the sluggish macroeconomic fundamentals, the weakness in US durable orders have seemingly more to run. If today’s data confirms the market qualms, the Fed hawks could retreat to the sidelines, letting the USD give back some of its recent gains to the end of the week.
The US sovereign bonds price in less than 20% probability for a Fed rate hike before the end of the year.
The euro, yen and pound are firmer against the US dollar today, well supported by an increasing demand for safe haven assets.
Pound Has Potential To Gain
Yesterday, the pound rebounded from 1.5221, a stone’s throw lower than the Fibonacci 50% retracement on April-June rise. The recent depreciation in pound has helped cooling down fears that stronger pound could jeopardise UK’s growth performance. Nonetheless, the pound may have reached a bottom and could be expected to head north despite the dovishness from the BoE officials.
Also, there is not much room left for a BoE doves at this point. The BoE, in opposition to many central banks, does not have flexibility to loosen its policy. Given that there is only one direction at disposal, the pound is benefiting from a period of undervaluation against the US dollar and the euro. Technically speaking, the pound has no particular reason to trade below 50% since it rebounded from April bottom. Especially, the positive outlook in wages suggests that pound's fair value is closer to 1.60 mark than 1.50 against the US dollar.
Hence, a fair value would have been 1.60 against the US dollar and 0.70 and below against the euro. Given the already undervalued pound, there is not much momentum to collect on the downside. If the market does not react to BoE doves, it is a sign that we are getting close to exhaustion on the sell side in the pound market.