Incisive market commentary from David Morrison

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GDP data in focus - AM Briefing
28 Apr 2017
ECB round-up and US GDP look-ahead - Video Update
27 Apr 2017
ECB meeting in focus - AM Briefing
27 Apr 2017
ECB's Rate Meeting, a look ahead - Video Update
26 Apr 2017
High hopes for Trump tax cuts - AM Briefing
26 Apr 2017
Global stock indices storm higher - PM Bulletin
25 Apr 2017
Indices mixed after firmer open - AM Briefing
25 Apr 2017
How to use Stop Losses in FX - Trading Guide
24 Apr 2017
French vote sees risk assets soar - AM Briefing
24 Apr 2017
Mixed European open despite Wall Street rally
21 Apr 2017
French Election in focus - Video Update
20 Apr 2017
French election and oil keep investors cautious - AM Briefing
20 Apr 2017
Equities off highs but still show resilience - Video Update
19 Apr 2017
Equities continue to drift lower - AM Bulletin
19 Apr 2017
Sterling soars on early UK election, but France the biggest concern
18 Apr 2017
Europe shrugs off US rally - AM Bulletin
18 Apr 2017
Trump's mouth sends dollar skidding lower - Video Update
13 Apr 2017
Dollar slumps on Trump comments - AM Bulletin
13 Apr 2017
Uncertain outlook ahead of holiday weekend - Video Update
12 Apr 2017
Equities recover after yesterday’s wobble - AM Briefing
12 Apr 2017
USDJPY approaching support - PM Bulletin
11 Apr 2017
Equities drifting in holiday-shortened week - AM Briefing
11 Apr 2017
Look-ahead to Janet Yellen’s speech this evening - PM Bulletin
10 Apr 2017
All eyes on G7 and Yellen - AM Bulletin
10 Apr 2017
US missile attack sends investors into “risk-off” mode - AM Briefing
07 Apr 2017
FOMC minutes rattle investors - Video Update
06 Apr 2017
Stunning reversal greets Fed minutes - AM Briefing
06 Apr 2017
ADP number points to big payroll beat on Friday - Video Update
05 Apr 2017
FOMC minutes in focus - AM Briefing
05 Apr 2017
US indices flag as first quarter ends - PM Bulletin
04 Apr 2017
Disappointing start to the new quarter - AM Briefing
04 Apr 2017
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USDJPY approaching support

We’ve had a very good run up in risk assets since February last year. As far as the major US stock indices are concerned there have only been two sharp, but brief, pull-backs since then. One came last June after the UK voted to leave the European Union while the second came in the immediate aftermath of the Trump election victory in November last year. In the latter case the sell-off in risk assets lasted little more than a few hours and it wasn’t long before the major US indices surged on to make a succession of fresh record highs - the last occurring in the NASDAQ100 this time last week. 

But investors are showing signs of nervousness now and there are a combination of reasons. Firstly, the US Federal Reserve looks set to continue to tighten monetary policy. But rather than concentrating on pushing up its Fed Funds rate at a steady and measured pace, it has just made it clear that it is prepared to start reducing its balance sheet later this year. This is a bit of a problem for investors as no one has yet worked out what a 0.25% rate hike is equivalent to in balance sheet reduction terms. On top of this, there is also a concern that the Fed may be raising rates just as the strength of US economic growth is being thrown into question. The latest Atlanta Fed forecast for first quarter GDP points to an increase of just 0.6% - well below the 2.1% increase in the fourth quarter of 2016, and miles below President Trump’s target of 3% plus growth.

Then we have the Trump administration’s promises on tax reform and infrastructure spending. Ever since the failure to push through the House the repeal and replacement of Obamacare, Trump’s fiscal stimulus measures are looking less and less likely to pass through Congress. This has led many investors to question the validity of the stock market rally since November.

And now we have this sudden escalation in geopolitical tensions, triggered by last week’s US missile strike on a Syrian airbase. The bellicose rhetoric has risen on all sides and we now have a number of financial markets reacting accordingly. Equity markets have pulled back from their best levels (but not by much) while oil and gold are pushing higher.

Now one of the most useful barometers of the “risk on/risk off” trade is the USDJPY. This is because when market sentiment is positive investors typically borrow (sell) the ultra-low yielding yen and use the proceeds to buy higher-yielding and riskier assets. This sends the yen lower so the USDJPY rallies. But when market sentiment sours, the trade is reversed as risk assets are sold and the borrowed yen are then bought back, pushing up the value of the currency.

Here is a daily chart of the USDJPY. I’ve drawn on a Fibonacci Retracement from the low which immediately followed Trump’s election victory to the high just five weeks later. As we can see, the area around 110.00 is quite critical as it represents the 50% retracement of the Nov-Dec rally. A break below here would suggest that investors are beginning to doubt the wisdom of the “buy the dip” trade that has worked so well for so long.


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Posted by David Morrison

Category: PM Bulletin

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