Espresso Morning Call: Flash crash continues GBP volatility

What we are looking for

• USD strength continues: However, there is huge volatility and markets are flying around. Initial spikes overnight are unwinding but for how long? 
• GBP flash crash: Huge selling on Friday continued overnight. A flash crash to 1.0327 on GBP/USD has already unwound by more than 400 pips. The wild ride is likely to continue.
• Indices steadying, for now: Indices were sharply lower again on Friday but look more steady today. 
• Commodities fall back: Precious metals had been holding up well until the US session on Friday. Prices have fallen and continued lower today.
• Data trading: USD will keep an eye on the Dallas Fed Manufacturing index, but it is unlikely to make any sustaining impact on positions. Also, watch for a wave of Fed speakers.  

Overview

Major markets seem to be seeing ever more aggressive waves of selling. The flash crash in GBP is a headline-grabbing move. However, there are other sharp declines also across major forex, commodities and equity market indices. GBP has plummeted since the “mini-budget” from the UK Government on Friday. In the small hours of thin liquidity of the Asian session this morning, a flash crash saw Cable spiking down to 1.0327. The move has already unwound +400 pips in the hours since. Whether this is a bottom or the selling pressure resumes later is too soon to ascertain. However, we expect elevated volatility to continue.

There is a marginal sense of calm elsewhere this morning. US futures are trading higher to help support equity markets. However, given the nervousness throughout major markets and Treasury yields continuing to accelerate higher, any moves support may be short-lived.

It is a fairly bare economic calendar today. The Dallas Fed Manufacturing Index is the only significant data of note. The survey is expected to have improved in September but remains in negative territory. However, watch out for the ECB’s Christine Lagarde and three FOMC speakers who could certainly move markets later. 

Today’s news

Market sentiment is very nervous: Support has formed, but moves are very tentative. GBP continues to swing wildly overnight.

Treasury yields continue to move strongly higher: The acceleration higher of recent days continues into the new week. The 2yr is now at 4.30% with the 10 yr at 3.77%.

Japanese flash PMIs improve: The flash Composite PMI has improved back above 50 (back into expansion) at 50.9 in September. It was 49.4 in August and was expected to be 49.9.

German Ifo Business Climate falls sharply: The Business Climate has fallen to 84.3 in September from 88.6 in August. This was lower than forecasts and driven by deterioration in both current conditions and expectations components.

Cryptocurrencies are relatively stable: Coins are around levels where they closed on Friday. There is a basis of support forming initially. Bitcoin is +0.3% at $18920, with Ethereum -0.5% at $1294.

Central bankers speak: ECB President Lagarde speaks at 13:00 GMT. From the Fed, there are three speakers too. FOMC’s Collins (2022 voter, centrist) is at 14:00 GMT; FOMC’s Bostic (2024 voter, leans hawkish) is at 16:00 GMT; and the FOMC’s Mester (2022 voter, strongly hawkish) is at 20:00 GMT.

Economic Data:

• Dallas Fed Manufacturing (at 14:30 GMT) The survey is expected to pick up to -5.0 in September (from -12.9 in August)

Major markets outlook

Broad outlook: Very tentative, with a negative bias still an acute risk. 

Forex: USD is a key outperformer, with GBP continuing to fall sharply (albeit well above overnight lows) 

• EUR/USD has plummeted since Friday. It spiked to a low of 0.9550 overnight. There has been a recovery rally and we now need to see how this develops. If this is a capitulation then a sharp rebound can often follow. 
• GBP/USD has fallen off a cliff and there is no support. A decisive move lower on Friday has been followed by a flash crash overnight this morning. An intraday rebound of c. 400 pips from the low of 1.0327 reflects the huge risks either way right now. Catching a falling knife is a massive risk.

• AUD/USD has fallen sharply in the past few sessions. Trading at the lowest levels since May 2020, the market is into an old trading band 0.6370/0.6570. The RSI is now around 30 and is looking stretched but given how aggressive the move lower is, this may not restrict the sell-off. Initial resistance is 0.6570 and then 0.6670.

Commodities: Gold fell sharply on Friday but is trying to fight for support today. Oil has broken down for the next phase of its decline.

• Gold has broken sharply below $1653/$1654 to open the next support between $1550/$1610. An overnight rebound from $1626 threatens an initial technical rally. However, momentum remains negative and rallies are a chance to sell. The big resistance is at $1680/$1691.
• Silver was holding up well until the sell-off hit on Friday and a key near-term low at $18.77 was breached. However, there is a sense of support looking to form around $18.50 and a close back above $18.77 would be more encouraging again. The issue remains the four-month downtrend of lower highs. This attracts rallies to be sold into.   
• Brent Crude oil has broken decisively below support at $88.25 and has continued lower this morning. A move below $85.00 opens the next support around $80.00. We have continued to see old support act as new resistance, leaving $88.25/$89.00 as the initial basis of overhead supply.

Indices: An acceleration lower is testing the June lows.

• S&P 500 futures have fallen sharply lower to test the June low at 3639. So far the support is holding as the market is consolidating early today. The daily RSI is now around 30, at a level, several big sell-offs of recent months have found initial support. Initial resistance is 3766/3845. 
• German DAX has broken the support of the key March and June lows. This now means that 12375/12590 is now crucial overhead resistance. How the market reacts around here in the coming week will be an important gauge for the outlook moving forward. A bull failure on an attempted rebound could open the floodgates again. Initial support is at 12153, with little decisive support until the 11300 area.
• FTSE 100 has fallen to test the key June/July lows between 6969/7010. Momentum is at a key stage, with the daily RSI around 30 and at a level where March, June and August declines found support. Initial resistance is the old support between 7127/7172.

This material is for general information purposes only and is not intended as (and should not be considered to be) financial, investment or other advice on which reliance should be placed. INFINOX is not authorised to provide investment advice. No opinion given in the material constitutes a recommendation by INFINOX or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.