Stocks eye bounce but sentiment fragile, Brexit signals positive for pound

“The Dow was briefly green yesterday but the positivity didn’t last long. The DJIA (-2.13%) shed more than 545 points in the session to close at just above the 25k level. The S&P 500 (-2.06%) also put on another dismal showing and is now testing its 200-day moving average. The Dow has also found support on the 200-day moving average.

Now futures and Asian markets are turning positive – a sign of the proper recovery kicking in, or another dead cat bounce? US futures suggest gains of more than 1%. Asian markets have also rallied but are coming off significantly lower levels.

European markets are also set for a rebound today with the Euro Stoxx 50 eyeing a 1.5% gain on the open. The FTSE 100 is expected to open above 7050 having tested key support at 7,000 yesterday. The Dax close below important support at 11,700 yesterday but futures indicate it will open up around 1320 points higher – although crucially below this key level.

Sentiment does remain fragile – having been initially a reaction to the sudden rise in US bond yields, the selling has taken on a broader risk-off guise. That means that whilst we initially saw bonds and stocks sold off in lockstep, we are now seeing bid for bonds as investors seek those attractive yields.

And this is a broad-based selloff. Two thirds of the S&P 500 is in correction territory, while over a quarter is in full bear market territory. Moreover the selling is taking place on very heavy volume.

The breadth and depth of the decline in the US market is a concern and suggest earnings and valuations are a factor. In addition to the yield narrative, in many ways this selloff could reflect real angst about the Q3 earnings season and what outlook is painted by corporates on earnings calls. Whilst 20% EPS growth is anticipated and is likely to be delivered given the strong high frequency eco data from the US over the quarter, the question is to what extent corporates see the boost from tax cuts and other stimulus lasting. If they paint a negative outlook on earnings growth then this selloff could intensify – all eyes on the banks today.

However, on the fundamentals the reasons to be positive remain in place. The fact that the US inflationary pressures are not running out of control continue to suggest this is a picture of good news and fundamental strength. Certain technical indicators (note a bullish doji star on the Dax yesterday) may suggest support is emerging.

Elsewhere in the currency markets sterling is moving higher amid signs there is more progress on Brexit and it looks like a deal could well be imminent. The question is now less whether the government and EU can strike accord, but more about whether Theresa May will get any agreement that works with the EU through parliament. Likely DUP opposition on any Northern Ireland backstop deal and ERG opposition among the Conservatives could scupper the deal. This opens up the likelihood of fresh uncertainty and any deal-based rally in sterling may not last. GBPUSD firm bid above 1.32 and likely to face stiff resistance at 1.33, the Sept 20th high.”