European markets were on the back foot after taking their cue from a bruising session in Asia and a bad day in New York on Monday that saw the Dow give up 177 points after hitting a record high in the previous session. Stocks go up one day, down the next – should we read too much into this?

Clearly the rise in global sovereign bond yields has unsettled investors and hit riskier assets. US 10s are holding above 2.7%, while the 30-year T note is approaching 3%.

Certainly the dynamics have shifted in bond markets. Central banks are either out of the market or buying fewer bonds. The Fed is now in the business of selling not buying. The ECB seems to be teeing up a short taper that could see QE end in September, which is a shade earlier than most anticipated back in December. The BoJ is also tilting towards normalisation, albeit much more slowly.

Although the downtrend in yields could reassert itself, there is not much further to go and the cyclical elements would point to yields inching higher.

At this stage in the cycle we would expect yields to move higher as markets bet on growth and inflation; as long as there is no sharp correction or spike higher, equity markets ought to have no reason to be unduly unsettled for the time being – indeed the pro-growth environment ought to support equities as investors rotate out of fixed income into shares. Sharper earnings growth continues to underpin the bullishness and is a more sustainable basis for asset price growth in the long term than pure optimism.

Nevertheless, these moves higher in yields do correspond with equity market selloffs in the past so it would be wise to remain on guard. Increasingly we are seeing investors positioning for a correction more than they have at any time in recent months – Vix at 14 suggestive of heightening concern that a correction is coming.

In currency markets, the pound has slipped back below $1.40. A touch of dollar firmness weighing but there are renewed concerns about Brexit that are hitting sterling. The EU seems to dictating terms on the transition to the British government in a manner that has angered hardline Brexiters, risking a rift in the ruling Conservative party. May’s premiership looks shaky at best. Meanwhile the British continue to vacillate, meaning any deal is taking longer than it ought to take, risking the chance that the lack of clarity leaves businesses invoking their worst-case scenario plans. The post-December optimism is waning and while the cliff-edge exit is not in play, the chances of a good deal appear distant. Economic projections by the UK government showing any version of Brexit will be bad for the economy is hitting the headlines but has little impact on markets. Mark Carney is due to speak later today but there is little to suggest he will sound anything but dovish.

The euro dipped to its lowest in a week with German inflation data pointing to a slowdown that will leave ECB policymakers with a headache if it translates into no improvement in the all-important core CPI number for the bloc, due tomorrow. Prices in Saxony slipped up 0.8% month on month, leaving annual inflation at just 1.4% having stood at 1.4% for the year to November. Flash GDP estimate due at 10am should continue to point to firming growth with a notable uplift from France - but it is inflation that matters. Euro bulls should be concerned a significant move lower in core inflation, were it to happen, would pull the rug from under the ECB just as it is looking to new staff projections in March to bolster the case for ending QE.


EURUSD bounced of support at $1.2335, a leg of support defined last Thursday. Below that we can look at 1.230, the 38.2% retracement of the rally in January from $1.19 to $1.25.

For GBPUSD the move to $1.40 means it is sitting on the 38.2% retracement of the January rally and a move to $1.39, the 50% retracement, is on the cards if sentiment remains bearish. This could mark the end of the rally and would call for a move to 1.38580, the 61.8% retracement of the pre-Brexit high to post-Brexit low. On the upside, $1.4130/1.4160 would need to be scaled for a move back to the recent highs above $1.43.

FTSE 100 has bounced off previous support at 7600. Firm rejection of the move lower could signal a recovery but all depends on where we close. At present it’s a down day with miners all off colour as metal prices are hammered. 

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