Equity markets – US markets decline   

Equity markets declined on Monday in Europe but we wanted to saw this move validated yesterday in US and that’s what happened. With the US investors following Europe with declines, odds for a larger correction are substantially higher. Libya provided an excuse for this move but just like with the case of Egypt in January it’s not enough to drag markets substantially lower. Therefore, the question  is, a) were market overbought enough to initiate a longer slide just on such excuse and b) will there be an additional fear factor (Portugal is still in the pipeline and the Chinese may add pressure too with a recent news possible capital raising by the Chinese banks). Unless markets are hit by additional fear factors, a typical 8-10% correction on the S&P500 will be the most we could expect.

Technically, the S&P500 futures are still in a profit-taking mode. They key support is around 1300 pts. – not only a round psychological level but also a lower limit of a multi-month wedge formation and local highs from January. Should the contracts break that level, we could expect a longer dominance from the bears.

EURUSD, USDJPY – Treasuries up, dollar down

The dollar gained on increased risk aversion in Tuesday’s Asian and early European trade but soon those moves were reversed in a response to developments on the fixed income markets. The US yields declined along the curve but mostly on the longer end (5-10 years) partly in a response to a shift in sentiment on equities. In the euro zone, meanwhile, bonds advanced only slightly (yields on 5-10Y bunds fell by just 2-3 bps against 13-14 bps for Treasuries) and shorter rates actually increased after a hawkish statement from Yves Mersch. That led to a significant appreciation of the euro against the dollar. The US currency was down against the yen as well. However, one needs to keep in mind that initial claims data (due tomorrow) may still change the picture.

Technically, bulls on the EURUSD improved their situation markedly. A reversal was underscored by the hammer candle on the daily interval with the bottom at the support line (drawn along local highs from early February). At the European opening today the pair is testing a resistance at 1,3725 and should it succeed, bulls may charge towards 1,3860. However, only breaking the 1,3860 may change the larger picture for the pair.

A key decision is there to be taken by investors on the USDJPY as well. The pair declined to 82,50 but faced and took advantage of a support at that point – a line drawn along January’s highs. That might be decisive for at least a medium-term. Should the pair decline below that line chances for any rally in a near term would be close to zero. On the other hand, a rebound from this support may refuel the bulls and redirect the pair back towards 84,00.

Events to watch – home sales data, BoE minutes and central bankers

Home sales data releases in the US (10.00 ET, 16.00 CET, consensus 5,22 mln) is unlikely to influence the market sentiment in a significant way. The minutes from the latest BoE meeting might have some impact on the GBP and otherwise forex investors should pay some attention to central bankers taking stage today: Trichet at 12.00 ET (18.00 CET), Weber at 12.15 ET (18.15 CET) and Fed’s Plosser at 1.30 PM ET (19.30 CET – especially interesting as a potential dissident within the Fed). Equity investors should still pay attention to the opening on Wall Street as a larger decline is still in cards but depends mostly on a psychological factors.   

Przemysław Kwiecień PhD, Chief Economist

Disclaimer, investment risk warning
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