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Currency Feed – Wednesday 22nd March

Markets slump as investors recognise Trumps uphill struggle to deliver pro-business agenda in a timely fashion

Stock markets suffered their worst falls since the election of Donald Trump yesterday, as market participants worries about the prospects for the US president’s pro-business agenda triggered a rush for financial havens. A wobble on healthcare reform dented optimism about Mr Trump’s ability to enact his campaign promises on tax cuts, infrastructure spending and deregulation, which investors hope will boost economic and earnings growth and have produced the so-called Trump trade.

A sharp and sudden sell-off for US financial stocks helped push the S&P 500 down more than 1 per cent for the first time since October and provided fresh momentum to the recent rally in Treasuries, adding to pressure on the dollar. Easing political concerns in the eurozone pushed the euro above the $1.08 level while sterling hit a three-week high within a whisker of $1.25 after the release of robust UK inflation data. Energy stocks were also big fallers as oil prices dropped yet again, although gold rose for a fifth successive session to its highest level since the start of this month.

Wall Street grabbed the headlines as the S&P 500 sank 1.2 per cent to 2,344, with the financial sub-index 2.5 per cent lower. The last time that the US equity benchmark closed more than 1 per cent lower was on October 11 2016. The small-cap Russell 2000 index tumbled 2.5 per cent wiping out all of its year-to-date gain. The CBOE Vix volatility index, watched by many as a gauge of stock market stress, was up 10.2 per cent in late trade at 12.50, putting it on course for its highest close since March 1st.

Some in the markets blamed the equity sell-off on concerns that President Donald Trump’s pro-growth policies could take longer to pass than expected, plus uncertainty over the future path of US interest rates, among other factors. Valuations, a sudden spike in volatility, worries about the ongoing FBI-Trump spat and others can all be cited, but whatever the ‘real’ reason, we should not get overexcited just yet. It is still too early to give this rally the last rites. Divyang Shah, global strategist at IFR Markets, said: “A healthy correction will help gauge the strength of the trend but will also likely be painful enough so as to sow the seeds of doubt.”

“The rally has been a great story, but it hasn’t had real conviction behind it. A lot of people are uncomfortably long equities and I don’t think these pullbacks will surprise anyone,” said Andrew Scott, head of Asia-Pacific flow strategy at Société Générale. “I don’t think a delay to healthcare reform is worth much more than 1 per cent off the S&P, but when people were looking to sell, it gave them a reason.”

Analysts at Capital Economics highlighted that the last time the cyclically adjusted price/earnings ratio (CAPE) of the US stock market was this stretched was around a decade ago, it subsequently plunged. “High valuations can sometimes be the proximate cause of a correction in asset prices,” Capital said. “But this is usually only the case when valuations have risen to extremely lofty levels, the bursting of the dotcom bubble is one example. More typically, a separate trigger is required. One potential candidate this time around is tighter monetary policy. “Persistently loose financial conditions suggest that the market is unwilling to do the Federal Reserve’s work for it, and we expect policymakers to raise interest rates in the next couple of years by more than investors are currently anticipating.” US Treasuries rose sharply as equities sank, pushing the yield on the 10-year note down 5 basis points to a three-week low of 2.42 per cent, and that on the two-year down 3bp to 1.26 per cent, flattening the yield curve.

The drop in Treasury yields helped push the dollar index down 0.7 per cent to 99.72, its first foray below 100 since early February. “The pressure on the dollar has picked up as US Treasuries rallied hard amid signs of disagreement among Republicans ahead of a key vote on the repeal of Obamacare, a sign for some that other dollar-supportive initiatives on the part of US President Donald Trump will face a tough uphill battle from here,” said John Hardy, head of FX strategy at Saxo Bank.

The euro was up 0.7 per cent at $1.0809 amid an easing of worries about the forthcoming French election. “In the early hours of the morning the euro appreciated because the independent presidential candidate Emmanuel Macron emerged as the winner from the French presidential debate,” said Esther Reichelt, currency analyst at Commerzbank. “Fears of a surprise victory of the populist candidate Marine Le Pen, who once again demanded a referendum on France’s future in the EU and that France leave the euro, are abating.” The dollar was also down 0.7 per cent versus the yen at a three-week intraday low of ¥111.73.

Sterling rose 1 per cent yesterday to $1.2484 after data showed the annual rate of headline UK inflation coming in well above expectations at 2.3 per cent. “Now that inflation is starting to rise sharply, the question is will the BoE try to protect living standards and bring inflation down by raising interest rates?” asked Kathleen Brooks, analyst at City Index.

EUR/USD – Current Price $1.0802 (-$0.0006)

EUR/USD moved a little lower overnight, down to around 1.0790, before finding some support as European desks opened, sending the rate back up to around 1.0810. Ahead today, pan-Eurozone current account and US existing home sales data will be in focus. In terms of technicals, February 2nd high at 1.0828 may offer some resistance ahead of the December 8th high at $1.0872. On the downside, the overnight low at 1.0790 and yesterday’s low at 1.0717 are in focus.

GBP/USD – Current Price $1.2476 (-$0.0001)

The CPI inspired rally in sterling appeared to have run its course overnight with Cable trading in a narrow 1.2464-1.2484 range. However early pressure on the Usd as European trading got underway has taken the pair to fresh tops above the 1.2500 level. No data scheduled today in the UK, but focus will remain on Brexit negotiations. From a technical view, the earlier high at 1.2505 may offer some resistance ahead of the February 9th high at 1.2582. On the downside, the overnight low at 1.2564 and yesterday’s high at $1.2435 are in focus.

USD/JPY – Current Price ¥111.51 (-¥0.20)

The risk aversion trade provided an additional boost to the safe haven JPY overnight, which saw Usd/Jpy drop to near four-month lows around 111.30. Adding to this, Japan’s February exports rose the most in two years in February, restoring the trade surplus. Later today, US existing home sales will be in the spotlight. In terms of technicals, today’s multi-month low at 111.34 forms our first support level ahead of the 111.00 round figure mark. On the upside, the overnight high at 111.79, the 112.00 round figure mark and yesterday’s high at 112.89 are in focus.

GBP/EUR – Current Price €1.1543 (+€0.0002)

Having rallied to its highest level since March 7th yesterday after UK inflation data surprised to the upside, GBP/EUR is currently trading little changed after a small 1.1536-1.1561 range session. No UK data scheduled today, whereas pan-Eurozone current account and ECB speakers are in focus on the continent. From a technical view, the overnight low at 1.1536 may offer some support ahead of the 1.1500 round figure mark and Friday’s low at 1.1440. On the upside, the earlier high at 1.1561 and March 6th high at 1.1598 are in focus.

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