Equity markets remain under pressure

The majority of headlines on Tuesday are focusing on global indices, with stocks continuing to encounter bearish pressure during European trading. Investors are closing positions on stocks globally, but there are a variety of different reasons for the moves taking place. For example, the declines in the Dubai financial markets can be attributed to lower commodity prices, while Greek stocks are diving following the government in Greece announcing an unexpected snap presidential vote. The FTSE 100 has also continued its slide from yesterday, with this move being linked to the combination of lower oil prices potentially impacting company profits, alongside Tesco announcing a profit-warning.

The decline in stocks accelerated in China, with the Shanghai index slumping by 5% only a day after the majority of market headlines were concentrating on Chinese stocks surging by 20% over the previous few weeks. I think part of the reason behind the losses noticed in China today is that after stocks made these huge unexpected gains in such a short period, investors are seeing an opportunity to close positions and make a hefty profit. The other possible reason behind the stock market decline is that the China Economic Work Conference is set to commence on Tuesday. There is a threat that Chinese GDP growth could be downgraded to 7% during the conference, with this likely to unsettle investors and encourage stock selling.

As has been the focus since the summer, there remains concerns over global economic growth and the divergence of economic progress among the major global economies. The US economy is clearly leading the pack, with optimism around the UK economy dwindling as a bearish outlook on UK inflation and the upcoming elections in May prevent the Bank of England (BoE) from raising interest rates.

Bearing in mind concerns over the global economic outlook are continuing to control headlines and the European Central Bank (ECB) let stock markets down with no further stimulus last week, these losses in stocks are not surprising. After all, the major contributor behind the gains in global stocks has been central banks willingness to continue easing policy and pump more money into its economy. With the ECB leaving monetary policy unchanged and the possibility of the Federal Reserve next week announcing that despite the positive employment reports it will not be hurried into raising rates, stocks could continue to slide during December. It would likely require an unexpected move of easing from the People’s Bank of China (PBoC) to provide the stock market bulls with another rally.

In regards to how the stock market declines have impacted the currency markets, there has been some correlation to investors becoming attracted to the JPY. Since recording a new seven year high at 121.838 on Monday morning, the USDJPY has pulled all the way back to 119.534. Aside from the possibility of investors taking profit on the USDJPY after it finally surpassed 120, the JPY is really benefitting from concerns resurfacing over economic momentum in China. The JPY is the currency I am going to be closely watching as we enter 2015 because I think Japan is the economy that will benefit the most from lower commodity prices. Following unfortunate natural disasters, Japan has been forced into importing large amounts of its energy but the lower commodity prices will reduce Japanese imports and limit the country’s trade deficit.

The Euro has continued to rally with investors taking advantage of a reduced outflow of economic data from the US limiting USD demand, alongside the impact of the ECB leaving monetary policy unchanged last week. The Eurodollar appreciated as high as 1.2366 on Tuesday, but is finding resistance around 1.2374 preventing the pair from entering 1.24. The longer term risks for the pair are still largely to the downside; what we are encountering right now is just a small correction of recent losses.

After the GBPUSD climbed as high as 1.5693 earlier in trading, Sterling bulls were left halted with the pair’s attempts to enter 1.57. The market reaction to the Industrial and Manufacturing production data from the UK was unfavorable to the Pound, with both releases missing expectations. UK Manufacturing Production unexpectedly dropped for the first time in five months, resulting in bearish movement in the Cable. The GBPUSD quickly declined by around 50 pips, with the Cable now finding some support around 1.5448. Stubborn support for the Cable can be found on the Daily timeframe around 1.5625 and the pair will need to extend below this level if it is to return to 1.55.

Written by Jameel Ahmad, Chief Market Analyst at FXTM.

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