11 Sep 2018

Market Brief: equity markets in disarray

Kevin Musisi

Dealing team

US equity markets plunged overnight, as both the Dow and S&P closed over 4% lower, marking the worst day since August 2011.

Today's data releases
  Key levels
09:00 EZ ECB's Weidmann speaks      
09:10 EZ Markit EZ Retail PMI   Support Resistance
13:30 US trade balance GBP/USD 1.3871 1.4345
13:50 US Fed's Bullard speaks GBP/EUR 1.1229 1.1508
Market overview

US equity markets plunged overnight, as both the Dow and S&P500 closed over 4% lower, marking the worst day since August 2011. Fear quickly spread to the Asian markets with the Nikkei, Hang Seng and Shanghai index closing down on the day while at the time of writing, the FTSE 100 is down 1.7%. A combination of rising global inflation expectations and predictions of a more aggressive removal of unconventional stimulus measures, together with rising interest rates predictions, has seen bond markets rally at the expense of equities with the results bearing fruit overnight. Market participants will be pondering if this marks the start of a new wave of risk aversion and a more persistent sell-off, or if this will prove to be a more short lived market correction after the stock market rallies in recent weeks. In terms of currency, the USD has regained a little poise, firming modestly against the euro to $1.24 – the currency pair was close to $1.25 at the end of last week. Sterling has slipped to the other side of $1.40, although the UK currency was on its way there yesterday following a disappointing services PMI in the morning.

 

Turning our attention to Europe, the ECB’s Draghi seemed relatively dovish in his annual report to the EU Parliament. On rates and inflation, he noted that while confidence in inflation’s convergence towards the target of close to 2% inflation had strengthened, "we cannot yet declare victory.” The ECB President also made comments on Brexit, raising some eyebrows as he said the ECB has no choice but to brace for the possibility that the UK will exit the European Union without a transitional agreement. Draghi told members of the European Parliament “the bottom line is this one - either the negotiation is well managed and there won’t be substantial risk, or it is not and then the risks will be there, so we’re certainly looking at that and we’ve got to be prepared.”

The day ahead

In the absence of key data releases today, all eyes today will be on how the equity market story continues to unfold. Elswhere, key speeches from ECB and FED speakers could provide some welcome distraction.

Thought of the day

The Berlin Wall, which claimed the lives of 140 people trying to cross it between 1961 and 1989, has now been down for longer than it’s been up. As a young boy growing up in Apartheid South Africa, the symbolism of the wall being demolished, was significant. If the Wall could come down, then Apartheid could one day fall apart too, was the message! If currency markets are to learn anything from these events, is that nothing is ever permanent or put another way - anything is possible. Whilst it may seem unthinkable that Cable could reach post-Brexit highs (above 1.5000) or trade lower than 1.2000 (the post-Brexit low), in the next 12 months, the reality is there is always a chance. Please speak to your FX dealer today, to ensure your business is prepared for the unthinkable.

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