Stocks mixed on the whole but ITA40 sinks; GBP remains under pressure

Summary:

• US stock markets resume near key support

• ITA40 falls to lowest level since March

• Pound remains under pressure

• Top charts this week - W20, USDZAR and Copper

Both the NYSE and NASDAQ will open for the first time this week at the bottom of the hour, with both exchanges closed yesterday for the Memorial Day bank holiday. Futures markets traded during a reduced session but it was pretty much a wash in terms of any volatility with no real sustained moves seen.  For the NASDAQ (US100 on xStation) last week’s low of 7270 could be seen as a key support region to keep an eye on, with the area also coinciding with the lows seen back in mid-to-late March.

It’s also worth noting that the market is attempting to make a break below the daily Ichimoku cloud for the first time since October of last year, in what could be seen as a potential indication of a change in the long-term trend. While it would still take either a sizable drop or 26 sessions to pass for the lagging line to confirm this break, the shape of the cloud going forward is favourable for shorts with a clear horizontal bottom projected for the coming weeks around the 7410-7420 region.

The reason for the underperformance of the Italian index is the fiscal situation. The European Commission considers placing Italy in excessive debt procedure and markets fear this will lead to a fresh conflict with the Italian government. ITA40 trades just above the psychological level of 20000 points.   

Sterling continues to languish close to a 3-month low against the Euro and near its lowest level since January against the US dollar, with the fallout from last week’s elections providing a headwind to any recovery for the pound. While there are many conclusions that can be drawn from the UK’s results in the recent European elections, the overriding one is that both the Tories and Labour will now likely seek to depart the centre ground to recoup some of their losses. Of the 10 leadership candidates Jeremy Hunt is arguably the most moderate, warning that a no-deal would be political suicide but the chances are that the victor will assume a harder approach.

This means that a compromise deal such as the one put forward by Theresa May seems even less likely and we’re moving closer towards a binary outcome of either no-deal or a second referendum. As far as the markets are concerned, this is not the most constructive for the pound even if it does retain the most beneficial possibility of cancelling Brexit altogether. The increased risk of a no-deal doesn’t look likely to diminish significantly anytime soon, and this provides an asymmetric risk to the downside that will keep sterling bulls cautious for the foreseeable future.

Our top charts this week focus on the W20, USDZAR and Copper and can be read in more detail through the xStation platform