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End of quarter makes traders shorter

It’s overly simplistic to lay the blame for the market decline at Donald Trump’s door. The first US rate hike this year, a slump in oil prices, the future of quantitative easing under higher inflation and end of quarter portfolio manoeuvring have played a part in markets changing course. Still the Trump Presidency, which has played such a large role in the rise in markets since November, is not to be ignored as a factor.


Probably the two biggest contributors to the idea that the world is reflating; a Trump-led fiscal boost and rising oil prices have come unstuck in the past fortnight. We have talked previously about the importance of Trump’s healthcare reform. The “Repeal and Replace” of Obamacare is a beta test for tax cuts. The universally agreed upon notion that ‘Obamacare is bad’ inside the Republican Party struggling to make headway in Congress is a bad omen for the trickier process of tax reform.



The first 1%-plus decline in major US equity indices in over a hundred trading sessions has spread to Europe. Major European equity indices notched up a third day of declines. It must be a week where winning streaks get broken; first the England rugby team then US stock markets.


Banks led the decline in European stocks, matching a similar pattern in the US. The return to form of the banking sector since the US election has epitomised the reflation trade. With the reflation dynamic under scrutiny, banks stocks have been hit the most.


A shooting outside Westminster did little to calm nervous investors in the City of London. Its heavy weighting towards basic resources meant the FTSE 100 saw bigger declines than the rest of Europe as copper prices dropped nearly 2% on the day. Confusion over the introduction of new rules banning certain electronic devices on flights saw travel and leisure stocks loose altitude.


US stocks dipped again on the open, although the pace of declines slowed. The Nasdaq bucked the trend, rising slightly. Some investors are using the decline as an opportunity to load up on popular names including Apple and Netflix.



A flight to safety in FX markets meant the US dollar was up against most major currencies bar the Japanese yen.


USD/JPY dropped below 111, a critical technical level which has held on three occasions since late November. While 100 offers round-number support, we suspect a bigger decline towards 109 and the 200 day-moving average.


GBP/USD slipped back on profit-taking after touching 1.25. Sterling is consolidating gains made after above-forecast inflation was reported on Tuesday. Whether Sterling extends its decline could depend on retail sales data released on Thursday. The recent trend in retail sales data has been that of disappointment, so signs of a turnaround would be especially well-received.


EUR/USD bounced back from early declines to retain 1.08. The euro benefitted as polls showed Emmanuel Macron extending his lead in the first round of the French presidential elections to 26% following a strong debate performance. Marine Le Pen on the other hand has seen support begin to wane as disenfranchised but more moderate voters gravitate towards Macron.



Brent crude oil touched a fresh three-month low on Wednesday, dropping below $50 per barrel. A surprise 4.95M build in EIA crude oil inventories adds to the concern the supply glut could take longer to reverse. It took three days to unwind all of last week’s gain in the oil market. In Friday’s note we said “The pain may not be over quite yet. Questions over the size of and compliance to OPEC output cuts remain and are a headwind to further oil price gains.”


Gold has been the obvious beneficiary of the latest bout of uncertainty. The rise in the price of gold began March 15 when the Fed raised rates, pre-dating the stock sell-off this week. We said last week that gold refuses to lay down and die. We attribute gold’s durability to a duel benefit to investors holding it. Gold is a hedge against uncertainty but also does well during periods when interest rates look like staying lower for longer, typically when stocks do well too.


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