Market sentiment has been wavering for weeks, but there has been a significant reaction in risk appetite in the days since the Fed meeting last Wednesday. Conventional wisdom would see a dovish FOMC meeting as risk positive, but not when markets are increasingly concerned over the prospect of a global cyclical downturn. Is the Fed dovish or turning bearish? Friday’s flash PMIs showed real concerns in the Eurozone, whilst the US data also missed to a significant degree. Markets are under pressure whilst safe haven asset classes are the place to be now. Gold and the Japanese yen have both benefitted, whilst bond yields have dived. There is now a key signal that many in the market have been worried about for some while. The implications of inversion of the US yield curve is always a hotly debated topic. However, the 3 month to 10 year spread has now gone negative. It now costs more to borrow for three months than it does for ten years. Whilst some watch the 2s/10s spread, the 3 month/10 year is the spread that the Fed considers to be the most reliable indicator of US recession and is something we will all be hearing a lot about in the coming days. Sentiment across equity markets has taken a big hit too, with Wall Street sharply lower and the malaise spreading quickly across major markets.
Wall Street closed significantly lower on Friday with the S&P 500 -1.9% at 2801 and US futures another -0.6% lower early today. This has hit across Asian markets with that and a stronger yen smashing the Nikkei -3.0% lower and the Shanghai Composite -1.9%. In Europe the selling seems to be a little less precipitous, with FTSE futures -0.3% and DAX futures -0.6% lower. In forex, there is a mild degree of dollar gains today even against the yen, whilst the Kiwi is holding up well as sterling continues to bash around like a fly trying to get out of a locked window. With commodities, the safe haven vibe is still helping gold higher, but the move is restricted slightly from the dollar bounce today. Oil is being hit again, but around -1.0%, with risk appetite under pressure.
After such a terrible set of Eurozone PMIs (with Germany being a prime reason) last week, today’s German Ifo data will be seen as another key indicator to watch today. German Ifo Business Climate is at 0900GMT and is expected to put the brakes on the decline with 98.6 in March (up from 98.5 in February).
Chart of the Day – EUR/NZD
Sharp euro weakness on Friday came as the kiwi continues to perform strongly and EUR/NZD has broken down again. Continuing to trade within the downtrend channel throughout 2019, an intraday breach of the February/March lows just above 1.6400. This move has re-opened the 1.6320 low from December, but there is a real risk of the pair breaking down to new multi-year lows now. The move needs to be confirmed on a closing basis, but already the momentum indicators are shaping for the move. This comes with further downside potential on the RSI which is in the high 30s still, whilst the M