Another hit for the European Markets

Global Markets

While the currency markets appear to have commenced the week quietly, there is volatility in indices with major European markets currently trading over 1% lower. The Volkswagen scandal is still making headlines and while this could be impacting investor sentiment, I would say that the losses seen throughout the European markets are far more closely linked to continuing concerns over economic growth in Europe and ECB President Mario Draghi’s reluctance to confirm whether further QE is on its way to Europe. Global economic health concerns remain elevated, therefore most major markets remain vulnerable to further losses with this including Europe, Asia and the emerging markets, that will continue to face consistent downside pressures from a combination of depressed commodity prices and reduced demand for trade from China.

I have to be honest, I don’t think that the Federal Reserve leaving US interest rates unchanged in September did anyone any favours and all it did provide was further confirmation that even the world’s major central bank is concerned over the pace of global economic growth. The US economy is more than ready for a US interest rate rise and last Friday’s impressive GDP performance further highlighted the divergence in economic sentiment between the United States and other major economies such as Europe, Japan and a China economy that is continually facing a decline in economic momentum.

While Janet Yellen repeating the Federal Reserve’s commitment to raising US interest rates in 2015 late last week has provided support to the USD, I am struggling to find confidence that the Federal Reserve will actually begin raising interest rates this year at all, and think they missed their chance to do so in September. The US central bank clearly highlighted financial market developments and global economic weakness as a major factor behind delaying a US interest rate rise and when you consider that the latter has been a continuing theme for some time, it really limits the possibility of the Federal Reserve raising rates at all this year.

I remain particularly bearish on Asian equities, and think that the Nikkei 225 is still exposed to further pressures. The Japanese economy is really struggling and if economic data fails to improve anytime soon, the Nikkei 225 is vulnerable to further selling momentum. Although the volatility in the Shanghai Composite is not as severe as a month ago and the market closed positive today, I do not think a floor in selling has yet been found, and a weak Manufacturing PMI on Friday will provide further concerns over declining economic momentum in China. This would also drag down sentiment in Asian markets as a whole and bearing in mind that most are expecting GDP growth in China next year to be even lower than in 2015, and this is one of the major reasons why I remain bearish on Asian equities.

USDJPY

Although the pressure is on the Japanese economy and expectations are increasing that the Bank of Japan (BoJ) will be forced to unveil more stimulus to reinvigorate economic momentum, the JPY is continuing to benefit from a riskoff trading environment from investors. The safehaven attraction of the JPY has actually led to the currency being an unexpected star performer of the previous quarter, which has seen the USDJPY crash from 125 to 116. Traders of the USDJPY can still find opportunities in the pair, and it is worth noting that prices are currently strongly capped below its 200 Simple Moving Average on the Daily timeframe around the 121 area. I am personally not bullish on the pair until it closes above its 200 SMA, and still see further pullback opportunities for the pair towards 118.

GBPUSD

After suffering another sudden reversal and dropping from 1.56 to 1.51 in just over a week, the GBPUSD still looks technically weak. Attraction for the Pound remains weak despite the consistently robust UK economic data, and it does appear that the currency is suffering heavily from the riskoff trading environment from investors. The UK economic outlook remains as consistent as it has been over the past year, meaning some traders might see the GBPUSD trading at 1.51 as a longerterm buying opportunity. In the shorterterm though, the fourmonth low seen at 1.5134 late last week is a fragile looking support level and a break below would most likely lead to a sudden move to 1.50.