‘Risk On’ falters; US yields vulnerable…..

After a six-week ‘risk on’, markets decidedly focus on the negative factors again. This is undoubtedly fuelled by the recent batch of weak macro data.

In the UK, the no-deal Brexit dominates headlines. This prompted the Bank of England to downgrade UK’s growth rate yesterday. Against this backdrop, the FTSE 100 Index is retracing from its recent peak at 7,200 into the round number support at 7,000. This floor may cushion some of the selling pressure.

For the German DAX Index, its large toppy formation is continuing to weigh on its recovery. I have pointed earlier this week that resistance is building as prices rally towards the long-term trend indicator (150-day moving average). Yesterday’s consolidation affirmed this view. We expect a period of choppiness beneath its large top.

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Turning to the US credit outlook, the US 10-year yield chart is reflecting a more modest economic outlook. Remember that just a few months earlier, investors were pricing in a robust US economic recovery, to be followed by multiple rate hikes. This view is now completely out of the window, replaced by a more dovish expectation.

The yield has slumped from 3.25% all the way to 2.55%. The recent rebound was capped at the prior range low at 2.80% – now converted into resistance (see below). The rate looks vulnerable to a further decline.

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Jackson has over 10 years experience as a financial analyst. Previously a director of Stockcube Research as head of Investors Intelligence providing market timing advice and research to some of the world largest institutions and hedge funds.

Expertise: Global macroeconomic investment strategy, statistical backtesting, asset allocation, and cross-asset research.

Jackson has a PhD in Finance from Durham University.