Fears start to increase as Brexit-FOMC loom

Discussion in 'Market Commentary' started by SimonDenham, Jun 10, 2016.

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  1. SimonDenham

    SimonDenham Simon Denham CEO Mercor Index Staff Member

    Markets are looking increasingly fragile as we approach the Brexit vote. With the dollar strengthening we are seeing a certain amount of reduction in risk assets and buying of save haven instruments. Japanese and European Bond yields are falling to record lows, German 10 year debt is now effectively zero (five year debt is minus 43 basis points !). I am not quite sure who would want to buy a bond with a negative yield but I guess there are a lot of people out there with a desperate need to ensure their money is worth less next year than it is this.

    Of course this is not actually true as buyers of such debt are generally forced into it through various financial requirements but it is a demonstration of the terrible situation the banking sector finds itself in at the moment.

    In all this the equity markets are suffering and the Dax has now had three 100 point plus falls in a row if (as looks likely this morning) it drops this far again today.

    Over the next couple of weeks we will have the Brexit Vote the Fed rate decision and the Bank of Japan meeting all of which are feared to be market negative. For those with the appetite this looks to be a possible sell the rumour buy the fact scenario. In the unlikely event of an exit Brexit will take many years to implement and it is entirely likely that even if the UK votes to leave then trade agreements will be reached which will in all likelihood leave the situation much as it stands now but with the UK no longer part of (or nominally subject to) any EU decision making processes. The world is no longer the fragmented trading arena it was in 1973 when the UK joined the Union and so the idea that somehow the UK and the EU will enter some kind of tit for tat trade war is fanciful.

    Anyway, as I mentioned, markets are looking very soft and it is tough to call a turn in sentiment. For every small rally we are seeing a bigger fall.

    Economic Data

    Geraman numbers out this morning are slightly on the side of the Angels with wholesale prices rising by more than forecast whilst general inflation was in line. Retailers look like they are being squeezed again but if they are willing to pay higher wholesale prices one assumes that they are reasonably confident of making this stick with consumers.

    French industrial output also increased above forecasts (as did the UK release earlier this week) pushing up to plus 1.2% versus just 0.4% expected.

    This afternoon we will get the University Of Michigan consumer sentiment number which is always an odd figure in that it is hardly ever above 100 (parity). Given that the US has generally grown over the last 50 years the only times in my lifetime that it has been over this mark was between 1997 and 2000 (in internet boom) more than one person has mentioned that the index should possibly be rebased.

    Indices

    FTSE

    The FTSE is suffering in line with other markets this morning as investors seem keen on exiting from positions well in advance of all the issues over the next few weeks. Large Friday moves are often dangerous traps for the unwary.

    As I write the FTSE is off around 70 points and is (in truth) looking very unhappy indeed. In general, it appears to be being dragged around by other markets (especially the Europeans who look excessively bearish on virtually zero data). There is a feeling that the market would like to have battened down the hatches intill the 23rd June but is not being allowed to do so.

    Support is at 6145/55, 6045/50 then 5980/90

    Resistance is at 6340/50 then 6410/30

    DAX

    Three bad days in a row are causing some serious concern over in Euroland. Any buying is just being swamped in the waves of sellers.

    A day for tin hats.

    Support is at 9880/90, 9795/05 and 9760/70

    Resistance is at 10280/90 then 10350/60 and 10410/20

    Dow

    Whilst Euro endures a big selling bout the US markets are sitting rather bemused by it all. Yes, the Dow is 100 from the recent highs but this equates to maybe 50 points on the Dax and 30 on the FTSE (i.e a minor trading reversal). If the Dax had not dropped 400 points over the last few days the Dow would no doubt be still up at the highs.

    We are still within striking distance of the 18000 level for the Dow which (as we mentioned earlier in the week) is something of a graveyard for the bulls in recent years.

    It is probably this fact that is uppermost in traders minds rather the events taking place over on this side of the Atantic.

    Support is at 17870/80, 17710/20, 17605/15
    Resistance is at 17995/05, 18050/60, 18215/25

    FX markets

    Euro

    The cross had a good go at rallying above 1.1400 on Wednesday and Thursday but could not hold against the strength of the Dollar. With so much uncertainty swirling the dollar (and swissy) is becoming the safe haven of choice. As has been the case many times over the years.

    This said the moves are not ‘radical’ and Euro bulls will be hoping that, once the fog clears, the cross will strengthen once again.

    Support is at 1.1300/10, 1.1223/35 and 1.1110/20
    Resistance is 1.1370/80, 1.1460/70, 1.1590/00 then 1.1720/30


    Sterling

    The Brexit warnings are having a smaller and smaller impact these days on the cross and even the polls showing the Exit side is actually gaining credence is not causing the woe that it did in the past. So whilst the equity markets are having a bit of a tizzy the currency markets seem less frantic.

    This said the pound is slipping in recent sessions and we are back into the 1.44 region which seems to have been (over the last couple of months) the steady state condition.

    We are currently just on support at 1.4430/40 but have bashed through it already this morning (and recovered) so it might not be that solid.

    Support is at 1.4430/40, 1.4380/90, 1.4320/30 and 1.4250/60

    Resistance 1.4560/70, 1.4745/55, 1.4810/20 1.4915/25


    Gold

    With the general nervousness around it is not surprising to see gold rallying.

    This type of rally is nice to see (for the bulls of course) but it is wise to keep a close eye on proceedings as a sudden switch in Equity or Currency sentiment can cause fast reactions in the Yellow Metal.

    Support is at 1252/54, 1240/42 1228/30 1216/18, 1204/06

    Resistance is 1270/72 then 1277/79 and 1286/88

    Oil

    The general commentary from the Oil companies has been that the oil surplus will last into 2017/18 which has caused a minor sell back but only as far as the 51 buck level. The strength in the market seems to be reasonably solid and it is hard to see too much selling pressure just now.

    Support is at 50.40/50 48.60/70, 47.40/50, 46.60/70 and 45.35/45,
    Resistance is at 51.70/80 and 52.05/15
     

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