Dax all-time high as markets bounce, sterling eases from $1.40

European markets enjoyed a buoyant start to the trading session, taking their cue from another jump on Wall Street. The end of the US government shutdown has markets focused on the positives again and was taken as the excuse to push the Dow Jones up 142 pts to close at another fresh all-time high. Earnings remain remarkably upbeat too. Currently the Dow is being called to open as high as 26300.

The Dax jumped 1% to notch a fresh all-time high short shy of 13,600, following a buoyant session in Asia that left the Nikkei at a 26-year peak and the Hang Seng at a new record peak. The FTSE 100 was a shade higher, lifted by EasyJet’s strong Q1 showing, although miners dragged.

Global stocks are at record peaks, we have super high valuations and volatility is still low – what could possibly go wrong? The doom-mongers were predicting a collapse for all of last year but there may just be signs that the bullishness is a little over done and we are due a correction. We’ve not a proper corrective move in the Dow since Jan 16 and it may well be coming soon if bond yields start to stretch out.

In FX, GBPUSD nudged up past $1.40 overnight but was unable to hold the bridgehead and was last trying to falling back to a defensive position at $1.39500. If that fails to hold it calls for a move to $1.3890, and then $1.38580, the 61.8% retracement of the pre-Brexit high to post-Brexit low.

On the upside, if cable can find its footing above $1.4000, the 38.2% retracement of the move from $1.71 to $1.19, then the 50% retracement of that move - $1.4590 – comes into play. But that could be a long way off and ultimately depends on continued dollar softness to play out.

EURUSD remains trapped in a range between $1.2230 (the 23.61% retracement of the January low-to-high rally) and $1.2300, where it has been trading since last Thursday. Support is still at $1.2160. A break below this brings the $1.20 handle very much into play. Resistance can be found at $1.23230, the January 17th peak, and a break higher brings $1.25 and $1.26 into view.

The ECB meeting this week is key and there is a chance Mario Draghi will disappoint by focussing attention away from the stellar growth picture and on the lack of uptick in core inflation, stressing that tightening depends on convergence with target.

USDJPY has been up and down overnight after the Bank of Japan left policy unchanged and governor Haruhiko Kuroda gave a dovish presser. The pair first dropped before the USD pared losses. USDJPY remains seemingly unable to break below 110.500 - the 61.8% retracement of the Sep-Nov rally - despite the fact that there is increasingly a bullish view on the yen. There is downside risk to be seen with the 50-day simple moving average likely to break below the 200-day SMA, a so-called ‘death cross’ that might be taken by markets as a selling signal.

For now at least the BoJ has done a pretty good job of keeping the lid on the yen bulls. Inflation projections remained unchanged (1.4% in 2018 and 1.8% in 2019) although there was a slightly more upbeat tone than before. This is the same quandary as that facing the ECB – any suggestion of normalising will lead to further yen strength and that will result in de facto premature tightening, making the BoJ’s eventual exit even further away. As markets weigh a possible early taper Governor Kuroda pledged to remain fully committed to easy money and said there was no discussion about an exit. His comments reassured markets and put a floor under USDJPY for the time being.

Finally bitcoin was on the back foot, sinking back towards $10,000 before paring losses as the market reacted to yet more moves by South Korea to rein in speculation. The cryptocurrency remains unable to break through $12,000. That level has been tested on Thursday, Friday and Monday and rejected and now bitcoin seems to be  unable to break out past $11,000 and was last trading at $10,500. A break below the round number support at $10,000 calls for a retest of the Jan 17th low around $9,200, which is the 61.8% retracement of the Sep-Dec rally. A breach here would point to support at $8,000. If it can find legs above $12,000, there is significant resistance at $13,200, the 38.2% retracement of the Dec-Jan trough and the 38.2% retracement of the Sep-Dec rally.

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