The nervousness that has been evident in the equity markets every time tensions flare up in Ukraine has once again been driving markets lower today. A flight into safe haven assets has been a feature of trading throughout the morning. The main beneficiaries have been safe haven bonds whilst the US dollar continues its considerable strength seen over the past few weeks.
Investors are clearly seeing a need to add protection to their portfolios as the VIX spiked back higher again yesterday. If the tensions in Ukraine continue and equity markets continue to decline, it would be likely that the VIX Volatility Index pushes higher to test the March 2014 high at 17.8 which is another 5% higher from here.
However within forex trading, in a change from what we have seen in the past couple of weeks, the Yen has been strong that the dollar today. This suggests increased levels of safety being sought by traders as the yen is still seen as the ultimate safe haven trade. This is the only real blot on the copy book for the dollar today. Having used the old resistance at 81.3 as the new support for a pullback (seen on Friday with the short-lived correction on the dollar), the Dollar Index is now storming ahead and there is significant upside potential now until the next key high at 82.6 with very little resistance.
Continued economic problems in Italy have added to the pressure on markets today too. A second consecutive quarter of GDP decline (down -0.2% for Q2) puts Italy back in recession. This decline was also unexpected (market had forecast +0.2%) and has come at a significant disappointment for one of the major economies of the Eurozone. This will just add the pressure on Mario Draghi and the ECB to put into process Quantitative Easing as the Eurozone deals with disinflation (close to deflation) and stagnant economies. This will put pressure on the euro again.
The strength of the dollar today is pulling EUR/USD and GBP/USD lower again. Both pairs continue to look very weak on technical momentum indicators and there is the potential for a technical rally, but the dollar strength is just not allowing the buyers to take any control at all. In this environment it makes trading difficult, but for now staying with the trend lower can be the only viable way to play these pairs.
Dollar/Yen is a different strategy as the yen benefits from the considerable drive into safe haven assets. This has pulled the rate back towards the support around 102.30. A close below the 102.30 support would suggest renewed yen strength and could usher in a pullback towards the 102.00 support area.
As I said in my Morning Report, despite the geopolitical tensions the lack of buying pressure into gold is a concern for me. I see the reactions being less dramatic as the weeks have gone on. I have seen nothing in today’s trading that does not suggest to me that there will not be further pressure on the $1280 support now.
European indices are being slammed by investors once again today as the sharp downside pressure resumes. The opening gap lower on the DAX remains open at 9152 but there is little appetite to buy the DAX at the moment, whilst the index continues to underperform the FTSE 100. For its part, the FTSE 100 has dropped to 6600 and the lowest since mid April. The outlook for all the European equity markets is now one of severe downside pressure and rallies that are being sold into. I believe that this is doing significant longer term damage to the bullish outlook with moving averages falling away and there is little reason why the FTSE 100 will not now come back to test the 6500 key March and April lows. The S&P 500 is set to open another 7 points lower at the open.