Global equity markets suffered another sharp decline yesterday in a continuation of the slump from last Friday. The S&P 500 finished the day 4.1% lower, the largest percentage intra-day drop since 2011, and coupled with the losses last Friday, the record bull run in US stocks of more than 400 trading days without a 5% correction has now been broken.
Asian equity markets have followed their US counterparts lower and the Nikkei 225 had fallen by around 5% as of midday local time. In FX markets, JPY and USD rallied driven by safe haven demand whilst the US 10y Treasury yield fell to around 2.75%.
GBP traded with an offered tone throughout yesterday’s session starting after another miss in UK PMI data, this time for services (53.0 versus consensus: 54.1). Concerns about a potential breakdown of EU-UK Brexit negotiations also weighed on GBP and comments from key officials in the last few days indicate that reaching a transition deal will likely be a very difficult process.
GBPUSD support comes in at 1.3935 ahead of 1.3800 with short-term resistance at 1.4050. In EURGBP, support is now found at 0.8850 and 0.8685 with resistance at 0.8930.
Euro area final composite PMI for January was slightly better than the flash estimate and came in at 58.8, the highest level since June 2006. ECB president Draghi spoke at the European Parliament yesterday where he warned that recent FX volatility could make it harder to reach the ECB’s inflation target and highlighted the difficulty of reaching a Brexit transition deal.
Elsewhere, the RBA kept its cash rate unchanged at 1.5% as expected and struck a positive tone on growth. Barclays Research expects the RBA to raise the policy rate by 25bps at its meeting in August and a further 25bps at the November meeting.