The end of the month is upon us and what a month it has been. It started with the spat between the US and Iran leading to the accidental shooting down of a Ukrainian airliner. Despite this, many equity markets continued their march to record highs. Phase 1 of the US /Chinese trade deal was officially signed as President Trump’s impeachment trial began. And then came the coronavirus, an unexpected development that would set world markets on edge. And finally today, we have Brexit. Remember Brexit? Friday the 31st of January 2020 finally sees the UK leave the EU after more than 3 ½ years of arguments and deliberation. And we never though it would happen…..
As you can tell from yesterday’s commentary, which was tinged with a healthy dose of English sarcasm, I struggled to come to terms with the late day moves in equities and FX. The WHO declares the coronavirus a global public health emergency and suddenly, it’s a ‘risk on’ event? All because the WHO chairman offered a couple of calming words? It was akin to the captain of the Titanic yelling ‘Don’t panic, it’s going to be OK.’! I’ll save you from the blow by blow rundown but today saw the fallout from Thursday’s late day price action. Add in a horrendous Chicago PMI number (42.9 v 48.8 expected) and it was a full-on melt down. The DAX and FTSE 100 both closed lower by 1.3%. The DJ would dive by over 2% or 603 points. The S&P and NASDAQ fared only marginally better. Gold would rally to 1,589 from 1,571. For FX it was a classic 'risk off' scenario with USDJPY dropping from 109.10 to 108.31. EURUSD would go the other way, rallying from 1.1016 to 1.1095 while GBPUSD would follow a similar path, heading to a high of 1.3209 from a 1.3081 low. AUD, NZD and CAD would all weaken. If Thursday made no sense, you could have written the script and made a movie about Friday’s moves before they happened. The big question from here, is what happens next? Will the spread of the coronavirus be contained and how many new cases will pop up around the world? It’s going to be a very uncertain and interesting week ahead.
For those of you that paid attention to my EURJPY chart from Thursday, you may well be surprised to hear we didn’t break the parallel channel I highlighted. In fact it would be topside of that channel that was touched rather than the downside (which you might expect under a ‘risk-off scenario’). So why was that? EURUSD strength was really the key as we broke previously highlighted key levels as traders rushed to cover shorts. This was more a reaction to the terrible PMI number than the coronavirus. So let’s quickly revisit the hourly EURUSD chart I posted last week. Resistance at 1.1040 broke like a knife through butter as did the next band of resistance at 1.1065-70. As you can see, a couple of recent highs will provide resistance ahead of both 1.1110 and 1.1120. Pullbacks should be limited, although we did come a long way on Friday. Medium term support at 1.0980 was never truly tested.