European markets saw the back of another negative week, with losses accelerating after the DAX broke below its October lows and falling to its lowest levels since March, as concerns increased that the war between Israel and Hamas could morph into a wider conflict.
UK markets haven’t fared much better with the FTSE250 sliding to its lowest levels in over a year, although the FTSE100 has managed to bear up slightly better.
Nonetheless the last 3 days of last week still saw the UK benchmark post 3 days of losses in excess of 1% pushing it back to its October lows.
US markets didn’t fare much better, reversing all the gains of the previous week, and also sliding back towards their October lows with the S&P500 closing below its 200-day SMA for the first time since March, with the risk that a break of the 4,200 level could trigger further losses towards the 4,000 level.
The S&P500 also joined the Dow Jones which also fell back below its 200-day SMA in the middle part of last week, leaving the Nasdaq 100 as the only US index still holding up reasonably well in the face of sharply rising yields.
Events over the weekend have offered some hope of compromise with the release of two Israeli hostages, and the start of some aid convoys into Gaza, prompting some modest weakness in crude oil and gold prices, however the exchange of fire between Israel and Hamas has continued, while the prospect of a new front on the Lebanese border remains an ever-rising concern as Israeli forces exchange fire with Hezbollah.
Markets also had to contend with a tsunami of Fed speak last week, the highlight of which came from Fed chair Jay Powell who seemed to lean into the idea of a pause when it comes to another rate hike next week, while at the same time saying that rates probably hadn’t been high enough for long enough, and that the neutral rate was probably higher than previously thought.
Last week saw US treasury yields reach levels last seen in 2007 prior to the financial crisis, while in the UK, we went one better with the 30-year gilt hitting levels last seen in 1998.
Haven demand also saw a big pick up with gold prices rising close to $2,000 an ounce while the Swiss franc also saw strong gains on that same demand, although both have eased slightly in Asia trading this morning.
Crude oil prices have remained underpinned despite this morning’s early pullback, closing higher for the second week in a row.
How much longer this market weakness can continue could well come down to events later this week and which may not be connected to events in the Middle East, with the release of the latest quarterly earnings from 4 of the so-called “Magnificent 7” which have helped to underpin the bulk of the gains in the Nasdaq 100, given that collectively they still account for 40% of the indexes market cap.
With Google owner Alphabet, Microsoft, Amazon and Facebook owner Meta Platforms all reporting this week the scope for a further lurch lower is high in the event of any sort of disappointment. Complicating matters further is the fact that even if the numbers a good an escalation in the Middle East could open the trapdoor to further losses.
We also have a few central bank rate decisions this week, the main one of which is the ECB on Thursday, although we also have the Bank of Canada on Wednesday, both of whom are expected to leave interest rate policy on hold.
With the start of the aid convoys over the weekend we can expect to see a slightly higher open for European markets this morning
EUR/USD – Continues to struggle above the 1.0620 area with a break above 1.0640 needed to target a possible move to 1.0740. The main support remains at the October lows at 1.0450, as well as the 1.0400 area which is 50% retracement of the 0.9535/1.1275 up move.
GBP/USD – Continues to struggle to rally through the 1.2200 area, while finding bids just above 1.2100. A move below 1.2000 targets the 1.1835 area, 50% retracement of the move from the record lows at 1.0330 to the recent peaks at 1.3145.
EUR/GBP – Spiked up to the 0.8740 area last week, before slipping back and closing lower. A move below the 0.8700 area could signal a false break and a possible return to the trend line support from the August lows now at 0.8650.
USD/JPY – Continues to struggle above 150.00 area, with resistance also at the previous highs at 150.16. A break of 150.30 targeting a move towards 152.20. Support at the lows this week at 148.75.
FTSE 100 is expected to open unchanged at 7,402.
DAX is expected to open 22 points higher at 14,820.
CAC40 is expected to open 15 points higher at 6,831.
