Overnight Rally Fails to Garner Any Momentum; Back Under Pressure
Generally speaking, markets in recent years have done a good job of taking their cues from the US, but this was certainly not the case overnight. We were particularly surprised to see such a rejection of the US market sell-off in Asian trade, given the scope of the setbacks seen on Wednesday. Nevertheless, overseas investors attempted to come to the rescue, using the latest panic dip as an opportunity to buy back into risk. Talk of a blowup in the French banking sector and fears of Eurozone contagion were put aside, and risk correlated assets initially responded quite favorably.
However, this all appeared to good to be true and we once again saw renewed pressure and fresh offers into this overnight risk rally. The Euro found renewed selling interest ahead of 1.4300, perhaps on a combination of a reentry of uncertainty ahead of the North American open, and a softer and more downbeat ECB monthly report. In the report, the ECB conceded serious downside risks to growth, uncertainty over the inflation outlook and also suggested that rates would now be on hold for some time.
All of these factors were net Euro bearish and again, this in conjunction with a very scared global macro investor base were the primary drivers of the pre-US session sell-off which also weighed on some of the other markets. Shares of BNP Paribas fell off a cliff, while SocGen stock had also pulled back sharply. European bank stocks in general remained under serious pressure and fast approaching a retest of the 2008 crisis lows. These fears over the stability in the Eurozone banking sector have sparked speculation that a downgrade to France’s credit ratings might be forthcoming, and any such event will undoubtedly be a catastrophic setback to the Eurozone’s ability to deal with its current debt disaster.
Elsewhere, the Swiss Franc was doing its own thing and breaking away from familiar safe haven correlations with the market coming under some intense pressure on Thursday following comments from SNB Jordan who said that the SNB would not be against pegging the Franc to the Euro for a period of time to stem the appreciation in the currency. Franc gains have been unrelenting in recent days, with the market trading to fresh record highs against the Euro, US Dollar and Pound. The SNB has therefore taken on a much more active involvement in the market and has been introducing many different measures in recent days to show a commitment to stemming further appreciation in the Franc. Jordan added that the SNB did not necessarily need to intervene in order to prevent the Franc from appreciating further.
Finally, although the Australian Dollar managed to climb off its daily lows, a much weaker than expected employment report overnight should not be ignored and could very well open the door for some more aggressive selling below parity over the coming session. Look for the market to now hold below the 200-Day SMA on a daily close basis. After trading as high as about +1.50% overnight, US equity futures had come in a good deal and we will once again wait to see how the US markets respond to Wednesday’s violent sell-off in the stock market.
Written by Joel Kruger, Technical Currency Strategist
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