LCG Research: A Turning Point for Equities as European Stock Point to Higher Open. “..bear markets are initiated by a recession and the US is still a long way from that point right now.” – With Jasper Lawler, Head of Research.

 

The Dow racked up another triple-digit loss overnight, tumbling over 500 points. Its second straight session of triple-digit losses, in a rollercoaster session. The S&P shed a further 2.1%, its 6th consecutive day of losses, and the Nasdaq entered correction territory after falling more than 10% from its recent high. Added to these eyebrow-raising figures, the fear gauge, the VIX, rose to an 8-month high. Investor sentiment was weak at best, hit again by concerns over interest rates and earnings season.

Wall Street gave a weak lead to Asian shares which started on the back foot, but which have since stabilised. News that the US won’t call China a currency manipulator allowed US futures to rise, offering support to Asian markets. European bourses are pointing to a stronger start after racking up some eye-watering losses across the week.

The sort of losses that we have seen are not usually sustained for long periods and are considered part of the standard ebb and flow of a market. They are not common, this is the second time we have seen it this year, but bear markets are initiated by a recession and the US is still a long way from that point right now.

Pound Supported as Brexit Deal Imminent

The pound capitalised on a weaker dollar and Brexit optimism in the previous session, hitting a 3-month high. Moving into Friday, the pound continues to hold its ground versus the dollar as Britain is on the brink of a Brexit deal. Reports that the two sides are making headway on the Irish border are fuelling optimism that a deal is within reach for next week.

Pound gains remain capped

Given that a deal is so close, we might have expected the pound to be trading higher still versus the dollar and the euro. However, investors are wary that there are still several hurdles for Theresa May to overcome, which present significant risks to the domestic political stability and the deal. The Northern Irish DUP, the minority party that Theresa May depends on to prop up her government is a growing risk. The DUP has threatened to topple the government if Theresa May ignores their pleas to avoid checkpoints between Northern Ireland and mainland Britain. This appears to be a point that Theresa May is willing to concede on to the EU who insist it is necessary to avoid a hard border in Ireland.

Even if a deal gets agreed, the threat of the DUP voting against the budget in a few weeks or even calling a vote of no confidence could see the Brexit deal unravel very quickly. Pound traders are aware of the potential risk that the DUP presents, which is keeping pound gains capped. Pound traders will remain fixated on Brexit headlines across Friday’s session.

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About the author

Jasper delivers regular commentary, seminars and webinars on market news, trading analysis, strategy and psychology. He is regularly interviewed by BBC News, Bloomberg, CNBC and Sky News, and has featured in The Times, Guardian and Daily Telegraph. Jasper hosts a weekly charting analysis webinar. He is qualified as a Chartered Market Technician (CMT) with the Market Technician Association, and has a degree in Finance and Economics.