Dow Jones scored the largest single day point drop in history [Video]

Today's Highlights

• Global market sell-off gathers pace

• UK Services Purchasing Managers' Index misses expectations

• Reserve Bank of Australia leaves rates unchanged

 

Current Market Overview

Dow Jones scored the largest single day point drop in history

Risk aversion has hit the financial markets and the sell-off has global stock markets intensified further. The Dow Jones scored the largest single day point drop in history overnight. The major reserve currencies have benefited, as the Japanese Yen, US Dollar and the Swiss Franc are all trading higher. Analysts are saying it’s a start of an overdue correction, the catalyst could be attributed to the rise in government bond yields, as traders switch from equities back to bonds.

Important week ahead for Brexit plans

No progress was made when EU Negotiator Michel Barnier met both David Davis and PM Theresa May yesterday. The UK ruled out a customs union with the EU that would keep them more closely bound. This is also an important week for the Brexit plans, as members of the Cabinet's "Brexit war committee" meet on Wednesday and Thursday to discuss this very issue.

UK Services Purchasing Managers’ Index misses expectations

The UK Services Purchasing Managers’ Index (PMI) missed expectations, expanding at the slowest pace in 16 months. It also comes after it was announced there was a slowdown in the PMI readings of manufacturing and construction in the first month of the year too. These disappointing PMI readings are in contrast to data showing the economy expanded 0.5 percent in the fourth quarter and employment growth was far stronger than anticipated. This had sparked a shift in expectations about UK interest rates, with investors raising bets on a hike as early as May – the data therefore cast doubts on any imminent rise in interest rates.

Bank of England rate meeting on Thursday

On Thursday, we have the Bank of England (BoE) rate meeting; no rate hikes are expected in February, however, we will get an idea of their projected path through analysing the voting member’s patterns, the accompanying statement and Governor Carney's verbal responses to questions in the press conference. Brexit risks continue to cause uncertainty about the outlook and weigh on the BoE's reaction function, given those risks have not changed substantially.

The main event will be the release of the BoE's Quarterly Inflation Report, as inflation is one of the main factors that lead to higher interest rates, and as interest rates are positively correlated to the Pound, this too could affect Sterling strength. If economic growth and inflation forecasts are revised higher, it is expected that Sterling will find some buyers. The BoE has said it is willing to allow inflation to overshoot for a limited period before tackling it. With the recent slowdown in the forward looking Purchasing Managers’ Index figures the BoE may be more cautious, especially given the recent rally in the GBP- which helps to curb inflation without raising rates. If, however, the BoE signals a rate hike could come in the coming months, the Pound will rise; if not, then it will fall.

Reserve Bank of Australia leaves rates unchanged

The Reserve Bank of Australia (RBA) left interest rates unchanged at 1.5%, an outcome which was widely expected by financial markets. The RBA said “The low level of interest rates is continuing to support the Australian economy,” however, the data disappointed this morning, with the retail sales figures coming in well under expectations, partially reversing a strong lift in November. The trade balance also missed the mark, with a deficit of -1.36 billion, as imports of fuels and machinery jumped during the month. The AUD is on the back foot, after the data release and the general risk aversion in the market.

Euro still in limbo

In Europe, European Central Bank President Draghi had some upbeat comments while speaking to the European Parliament, saying that economic expansion is broad based and “While we can be more confident about the path of inflation, patience and persistence with regard to monetary policy is still warranted.” This didn’t give the Euro too many bidders, Draghi has come out with similar comments before, the market is probably waiting to hear something more solid on what to expect in the future.