Markets lower as correction long overdue

Fiona Cincotta
By :  ,  Senior Market Analyst

Markets lower as correction long overdue 

Markets across Europe have dropped lower on the open, taking the lead from sharp declines in US and Asia overnight as investors keep a nervous eye on bond yields. 

Investors sold out of US equities on Monday as the sell off in US treasuries deepened, sending bond yields above 2.7%, to the highest level since 2014. The move demonstrates concerns in the market that higher future interest rates could call an end to the current bull market. These fears sent the down plummeting 177 points in the previous session, whilst the S&P closed 0.7% lower. 

The negative sentiment has ensured a weaker start in Europe with the FTSE off by 0.3% whilst the Dax and the Cac are trading 0 .4% and 0.3% lower respectively. Equity indices have been on a spectacular run over the past few months with the S&P rallying over 7% in the past month alone, a price correction is overdue and does not necessarily point to the end of the bull market. Whilst the volatility index (VIX), often referred to as a fear gauge for the market jumped, 24% in the previous session, the USD/JP, which also gauges market sentiment is proving to be fairly resilient. USD/JPY these levels of 108.65 is not considered dangerous territory, if we see a fall towards 107.50 -107, this would definitely set alarm bells ringing. 

May in the danger zone (again) sends sterling lower 

The pound continued to show signs of pressure as Brexit headlines pick up again after a quiet January. UK Prime Minister Theresa May is once again hanging on to power by a thread as members of her own party and the EU criticize her lack of vision and clarity over Brexit and the transition period. GBP/USD is being held at support in the $1.4020 region. The next support can be found at $1.40, a decisive move below this level could open the door to a sell off towards $1.3930.  

EUR/USD looks to GDP data & German CPI 

Higher US treasury yields and concerns over a gradual winding down of the ECB’s bond buying programme mean the EUR/USD extended declines in Asia and into the early part of the European session, hitting a low of $1.2236. However, the last the pair has jumped higher as US treasury yields have retreated, pulling the dollar lower. Euro traders will now look towards the eurozone Q4 GDP which is expected to show a move higher to 2.7% on an annualised basis, from 2.6%. German CPI will also be under the spotlight shedding some light on the on the inflation picture in Germany, ahead of the inflation release for the eurozone tomorrow. 

State of the Union address 

Looking ahead towards the US session, investors will be positioning themselves for President Trump’s State of the Union address. Whilst this speech doesn’t typically move markets, given Trump’s tendency to stray from the norm, some dollar hitting comments could be on the cards.

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