Speculations that Scotland could call for another independence vote hammered the mood in the pound market at the start of the week. The pound tanked to 1.2392 against the US dollar at the early hours of Asian session, after the Times of London reported that Scotland could ask for a second vote of independency as PM Theresa May triggers the Article 50 in March.
The Scottish concerns are, in fact, nothing new. The UK’s decision to quit the European Union had immediately triggered questions regarding Scotland’s future in the United Kingdom. However, the eventuality hasn’t been largely factored in the pound’s value so far. If Scotland decides to proceed with the second referendum to quit the UK, there would certainly be another fundamental downshift in the pound’s value, both against the US dollar and the euro.
In addition, news that the LSE (-3.14%) – Deutsche Börse (-4.08%) merger may not happen hit the headlines on Monday, as London Stock Exchange’s board said it wouldn’t pledge to divest MTS, a trading platform for European government bonds, as requested by the EU. The new regulatory challenge could be insurmountable. On a side note, there are other important issues that would potentially block the $13 billion deal that LSE and Deutsche Börse are working on for the past year, such as the Britain exiting the EU, the potential divergence the Brexit could generate between Briton and German officials, as well as the loss of competition in the sector.
Although there is no need for additional panic at this point in time, the week started with Brexit related concerns and the current deterioration in the sentiment could dent the appetite in the pound and encourage more bears to join the sell-off. A daily close below the 50-day moving average (1.2402) should send the MACD into the negative territory and indicate the possibility of a faster pound devaluation against the greenback. The next support is eyed at 1.2344 (50% level on January 14 to February 1 recovery), before 1.2259 (major 61.8% retracement).
FTSE 100 opened upbeat, mainly thanks to the weaker pound. Financials (-0.98%) were offered, while energy (+0.59%) and mining stocks (+0.51%) gained despite mixed commodity prices and stagnating oil market topped by multi-week resistance.
It is the moment of truth for the US stock markets
The US dollar started mixed against the G10 majors, as the US 10-year yields tested 2.30% on the downside. Leverage funds cut long USD positions for the seventh consecutive week, heading into Donald Trump’s first speech before the Congress on Tuesday. The markets will be fully focused on Trump administration fiscal plans, which may include a major boost to the spending in military, massive cuts to the US State Department and the Environmental Protection Agency (EPA), ‘phenomenal tax cuts’, deregulation and so.
The US stocks are set for new records on the count down to Donald Trump’s speech. On the other hand, the very high level of expectations suggests a rising risk of disappointment, which in turn could trigger a sharp sell-off in the US equity markets that have been running to records since Trump won the US presidential election in November.
Euro driven by the French
The euro appetite is largely impacted by the French election talks, as the first round of the presidential election is due in less than two months. The euro traders swing between the rising probability of Le Pen victory that has brought big financial players such as UBS, Barclays and BlackRock to meet with Le Pen’s aides, and the recovery in the independent candidate Emmanuel Macron’s popularity after being endorsed by François Bayrou, François de Rugy and Christophe Caresche.
There is a clear lack of visibility in the French election portrait. Although Le Pen is seen victorious at the first round, polls suggest that she would lose at the second, and the final round of the election. The volatility due to election polls will inevitably shake the Franco-German yield spread on the run up to the election and keep the long side appetite topped in the euro against the US dollar below the down-trending 100-day moving average (1.0650).
Against the pound, the euro recovered above the 0.85 handle. The three-week downtrend channel top, 0.8535, shelters decent offers, if surpassed, should leave the way for a further rise toward 0.8585/0.8600 area.
Hong Kong Exchange sees ‘challenging’ trading environment in 2017
Nikkei (-0.91%) and Topix (-1.04%) traded lower, as the USD/JPY extended weakness to 111.92. The pair is in the bearish consolidation zone. Below the critical 112.50 resistance (major 38.20% retracement on post-Trump rally), the USD/JPY could aim for a deeper downside correction to 110.60 (50% retracement) and 110.00 psychological level.
Shanghai Composite (-0.76%) and Hang Seng (-0.26%) are also under pressure as the Hang Seng index sees solid resistance pre-24000 handle. Hong Kong Exchange (-1.16%) was among the leading losers in Asia, after the announcement of full-year profit drop on trading. HK Exchange said that the trading environment in 2017 would remain challenging.