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FTSE shake-off despite volatile China
China woke up to another stormy day in equities. Asian stocks opened the week with another wave of dramatic sell-offs; Shanghai’s Composite tumbled by 5.33%, while the Hang Seng wrote-off 2.57%. ‘Interbank yuan lending rates in Hong Kong climbed to records across the board after suspected intervention by PBoC last week mopped up supplies of the currency in the offshore market’ according to Bloomberg News.

This shakiness in the Chinese market could hardly be prevented as investors push back on the PBoC’s interventions. Reticence to return to the Chinese stock market will remain until there is a fairly strong conviction that the bottom is in. Traders could also stand ready for another 10-15% depreciation in yuan. This does not mean that the 10-trillion dollar worth Chinese economy is collapsing at the speed of the stock sell-off. There is certainly a decoupling between the economic fundamentals and market behaviour.

European equities have to some extent shrugged off losses this morning with no clear driver apparent expect perhaps some bargain hunting in the wake of last week’s rout. The FTSE held ground at 5885 at the open, thanks to several positive updates from brokers. BAE Systems (+2.21%), the biggest gainer in the FTSE, has been overweight by JPMorgan as European defence companies are expected to outperform the aerospace in 2016. Whitbread and Sage Group have been upgraded to ‘buy’ at BoFA. Standard Life has also received a ‘buy’ recommendation at Deutsche Bank and Jefferies.

Same story, but different day for the UK miners.
Oil and commodities remain on slippery ground. The WTI traded 2.56% lower and is again testing the $32, copper and iron ore are down 2.42% and 4.38% respectively. Despite a marginal recovery in early trade amongst UK miners, given current fundamentals and any recent rally history the downside pressure will remain pertinent with copper now trading below $2/lb.

Gold remains above $1100/oz which helps support the likes of Randgold and Fresnillo. While above this level and with the choppiness in risk assets still a factor, we may see the precious metal strike higher,

Pound plunges deeper

The pound tested 1.4500, a fresh 5-year low, against the US dollar, euro-pound surged to 0.7555 for the first time since February 2014.

The Bank of England meets on Thursday and is expected to keep the status quo and to deliver a fairly dovish accompanying statement. Expectations for the first BoE rate hike are being pushed forward in time as the BoE will certainly not be in a position to raise rates within the six months following the first Fed rate hike. The sovereigns price in a 25% probability for a November hike from the BoE.

Selling pressures on Cable remain due to the divergence in Fed/BoE policy outlooks.

The surge in euro demand is well underway. The risk-off atmosphere is supportive of the single currency. The key mid-term resistance is eyed at 1.1030/45 (200dma) with intermediate resistance expected at 1.0980 (Fib 38.2%). On the downside, the break of 1.0710 should shift the attention to 1.0650.