Financial market research and analysis

The selloff in Wall Street extended overnight with the Dow clocking up losses of over 360 points, its worst one day sell off since May. Meanwhile losses over the first two sessions of the week hit 2%, the biggest two-day drop for the Dow since September 2016. The S&P and Nasdaq also tumbled 1.1% and 0.8% respectively.

Concerns over the high level of US treasury yields continued to pressurise equities for a second day. However, elevated treasury yields failed to sustain Monday’s lift in the dollar, which tumbled towards 89.00. Moving towards the European open on this morning the dollar looks set to fall through this level.

Trump’s State of the Union address broadly conciliatory

Trump manged to give the dollar a small, short-lived boost of 0.1% during his State of the Union address. Although this is a speech which doesn’t typically move the markets, the dollar was pleased to hear a more conciliatory tone from the President. There was no criticism of China or Russia and Trump even hinted at a willingness to work across parties. However, in typical Trump style, there were few details on a potential $1 trillion infrastructure spend, which was a blessing in reality, because elaborating on this could have pushed the already high bond yields, higher.

A more hawkish Fed?

With inflation expectations rising, increased attention will be paid towards the FOMC meeting today. Market participants are not expecting any change to policy, but possibly a slightly more hawkish sounding Fed, as lowflation concerns slowly start to evaporate. What is interesting about the moves that we are seeing in the markets, is that yields have been steadily rising over the past month, but the market only suddenly started paying serious attention to these yield levels at the beginning of the week when they breached 2.7%. This is unlikely to be a case of a particularly level being hit, and the market goes into meltdown, but a correction is certainly long overdue and can be considered healthy in market dynamics. US futures are pointing higher on Wednesday.

Asian stocks quickly reversed an early sell off following Trump’s address, Europe is pointing to a mainly positive open. The FTSE is seen lagging its European counterparts and could struggle to regain any of the 1% wiped off the stock market in the previous session, given the stronger pound following a confident sounding Bank of England Governor Mark Carney.

BoE Carney boosts sterling

Carney testified before the Parliamentary Special Committee late in the European session, giving a positive update on the UK economy, in light of wages increasing, and the economy being close to full capacity, despite the uncertainties of Brexit. GBP/USD rallied from a low of $1.3980 to a high of $1.4166, also finding support from a weaker dollar. The pound has since pushed through to $1.4185 as it targets the psychological level of $1.42

Eurozone core CPI to inch higher?

EUR/USD has resumed its rally with the bulls back in the driving seat thanks to broader dollar weakness and optimism surrounding the upcoming eurozone inflation reading. The pair was further supported by solid Q4 GDP reading of 0.6% quarter on quarter growth, the 19^th straight quarter of gains. EUR/USD has comfortably passed through $1.24 but is yet to make an advance on $1.25.

Eurozone core CPI is expected to finally tick higher in January to 1%, after stalling at 0.9% in the previous months, although CPI is forecast to tick down from 1.4% to 1.3% on a year on year basis. A weaker than forecast reading could drag the EUR/USD back towards $1.24/ $1.2390.

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