News of air strikes on Islamic State targets by the US and its partners have had an adverse impact on markets during the European session. The increase in geopolitical tensions that has been seen through the Middle East is driving a flight to safe haven assets today. This has meant that European equities have been severely hit, whilst investors have moved into US Treasuries, UK Gilts and German Bunds. With US Treasuries strongly higher the US dollar has been hit, with yields at the long end of the curve seeing the biggest dip. The US 10 year yield is currently down almost 2 basis points.
However other traditional safe haven trades such as the Japanese yen and gold have also benefited. These are all trades that have suffered in recent weeks as the US dollar has significantly strengthened, but this is seeing some retracement today.
Equity markets are seeing considerable downside pressure today. The DAX Xetra, FTSE 100 and CAC 40 are all over a percent lower on the day, whilst S&P 500 futures are suggesting the index is around 6 points lower (0.3% lower) when Wall Street opens. Reaction to the safe haven preference for investors is clearly the major driving force in markets today, although there is also the US flash manufacturing PMI at 14:45BST which could also have an impact. The expectation is for a stable 58.0, but any decline on that number could help the flow into safe havens even further.
The FTSE 100 has completed a 1 month top pattern on the move below 6773, which now gives an implied target of 6640.The downside pressure has been growing and any intraday rebound that brings the index up towards the initial resistance at 6650 should be seen as a chance to sell. The DAX is not as corrective as the FTSE 100, the key pivot level support at 9600 is intact, and whilst this remains so, the outlook will remain in the least neutral.
The precious metals prices have all been under significant strain, but both gold and silver are around a percent higher, helped by the weaker dollar and the classic move into safe havens. Silver would also have been supported by the news that the Chinese flash Manufacturing PMI data was slight better than expected. However, the move on both metals is still just a mere blip in the medium/longer term sell-off. The retracements could actually still be seen as another chance to sell. The resistance on gold starts around $1231, with $1241 being a key resistance of the old support. I would still be tempted to view this as another chance to sell.
The other key move has been the correction in the Dollar Index. This has been driven by the strength in US Treasuries which has driven yields lower. Subsequently, the euro has remained supported, whilst sterling is also gaining. However the major beneficiary though has been the yen. The move has seen Dollar/Yen move below the near term support at 108.47 to complete a near term top pattern that gives a downside corrective target at 107.40. This could actually help to renew upside potential as the momentum had become a touch stretched and in need of some of the froth being blown off the top. I still view Dollar/Yen as a medium term buy as I expect to see the 110.65 resistance tested in due course. I would see any move back towards the support around the old breakout high at 107.40 as a good opportunity to buy. Shorting the dollar is a risky strategy at this stage and any such move should be only done on a very near term basis. I only see this dollar correction as a near term move and expect the Dollar Index to regain its poise in due course.