Financial market research and analysis

The UK’s manufacturing and industrial production data surprised on the upside in September. The UK’s deficit eased to 11’253 million pounds during the same month, versus 12’800 expected by analysts; last month’s figure was revised lower from 13’245 to 12’350 million pounds.

Cable shortly traded above its 200-hour moving average (1.3160) posterior to the data release. The strong data could keep the GBPUSD above 1.3085 (November support) before next week’s inflation data, yet could hardly boost the hawkish Bank of England (BoE) expectations given the looming Brexit uncertainties and slower growth expectations in the next two years.

The European Commission cut its UK growth forecast to 1.5% from 1.8% this year, and predicted 1.3% and 1.1% growth in 2018 and 2019 respectively. If the European Commission's estimations are correct, the BoE will likely remain stuck in a low growth - high inflation loophole even with its dovish tightening policy.

On the other hand, the Brexit talks are complicated and bear no fruit. Businesses involving big banks, become gradually impatient and could throw in the towel if there is no clarity regarding the post-Brexit operating conditions by early next year.

Under these circumstances, pound traders need solid nerves to enter long positions. Next week's inflation data could be a tactical motivation, as the most recent data could confirm a further acceleration in the UK's headline inflation to 3.2% and give a temporary boost to the bulls.


Equity markets under pressure

The recent equity sell-off may have caused some investors to question about the plausibility of the actual stock prices.

Nikkei and Topix lost as much as 1% on Friday as the continuation of Thursday’s sudden and sharp sell-off. The unexpected and unfunded move has spilled over the European and the US equity spaces as well and let investors with little appetite this Friday.

European stock markets edged lower. US equity futures hint at a softer open in New York as well.


US stocks down on possibility of delay in tax reform

Even though the sell-off in the Nikkei was triggered by some sort of a synchronized feeling of discomfort above the 23’000 level, the US stock traders had a plausible reason to go off in a sulk. The S&P500 (-0.38%), the Dow Jones (-0.43%) and Nasdaq (-0.58%) traded lower in New York on fading tax reform hopes. Trump’s very much expected corporate tax cuts could be less ‘phenomenal’ than imagined so far, and may not be implemented before 2019. If so, do the current stock prices are justified by the expectations of future corporate cash flows with a less dramatic tax reform, or with no reform at all? If not, then it is worth noting that the mid-term technical support points on global indices stand at very distant levels given how far the Trump-rally stretched over the past year. As a reference, the Fibonacci 23.6% retracement level stands at 2’462 for S&P500, at 22’174 for Wall Street, at 21’678 for Nikkei 225 and at 7’335 for FTSE 100.

This being said, there is no reason to panic just yet. The VIX index rose to 10.50%, as some investors were tempted to hedge their long positions for an eventual downside correction. Yet, it is certainly too early to tell if this first move could develop into a deeper downside correction on the post-Trump rally. The VIX is still at very low levels compared to its historical trend.


Gold, yen purchases to be capped

Gold and the yen gained on risk-haven inflows. With no outstanding reason that explains the sudden reversal in the market mood, the risk-off rebound in safe-haven assets could remain capped. Gold should meet resistance at $1’292/1’293 (50-day moving average / upper Bollinger band on daily chart). The USDJPY is expected to convince dip-buyers by 112.83/112.70 (lower Bollinger band on daily chart / 50-day moving average).


Euro yields rebound, EUR strength yet to be confirmed

The euro yields bounced higher on Thursday and Friday, pushing the EURUSD above its 200-hour moving average (1.1620). The euro’s actual strength will first be tested at 1.1680 (minor 23.6% retracement on September- November decline), then at 1.1760 (major 38.2% retrace). Below this level, the mid-term positive trend remains at risk with the possibility of a slide to and below the key Fibonacci support of 1.1509, major 38.2% retrace on April – September rise.


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