Global stocks gripped by risk aversion

19 October, 2018

It has been a turbulent trading week for stock markets as trade worries, global growth fears, Italian budget concerns and geopolitical tensions led to a deterioration in risk sentiment.

Although global equity bulls made an appearance mid-week thanks to upbeat US corporate earnings, this was short-lived after hawkish Federal Reserve minutes reinforced expectations of higher US interest rates. With geopolitical risks likely to promote risk aversion, investors should fasten their seat belts as global stocks may have more instore for a rough and rocky ride downhill.

Asian shares were mostly mixed this morning after China’s GDP growth for the third quarter of 2018 printed below market expectations. The risk-off vibe from Asian markets could infect European shares this morning and trickle back down into Wall Street later in the afternoon.

China’s GDP slows to 6.5% in Q3

Sentiment towards the world’s second largest economy was dealt a blow this morning following reports that growth slowed to its weakest pace since the global financial crisis during the third quarter.

China’s GDP growth came in at 6.5% in Q3, slower than the 6.7% recorded in Q2 as trade tensions with the United States weighed on the economy. With the growth outlook for China looking discouraging as US tariffs take effect, this is certainly bad news for emerging markets – especially those with a strong economic reliance on the nation. When China sneezes, it is not only emerging markets that will catch a cold but the rest of the world. Further signs of a slowdown in economic momentum is likely to compound risk aversion, ultimately impacting global sentiment.

Turkish Lira star of the show in EM currency space

It has been a positive trading week for the Turkish Lira which has gained 2.88% against the Dollar since Monday. Easing tensions between the United States and Turkey following the release of American pastor Andrew Brunson could be a likely factor behind the Lira’s appreciation. While optimism over the US lifting some sanctions on Tukey is good news for the Lira, the upside remains capped by external factors in the form of Dollar strength and trade tensions. In regards to the technical picture, the USDTYR has the potential to trade towards 5.45 if a weekly close under 5.60 is achieved.

Currency spotlight – EURUSD

The uncertainty revolving around Italy’s controversial budget plans coupled with Brexit developments have weighed heavily on the Euro this week. An appreciating Dollar rubbed salt into the wound with the EURUSD sinking towards 1.1440 on Friday morning. The EURUSD has been on the back foot for the most part of this trading week and is likely to sink lower in the near term if a weekly close below 1.1480 is achieved. Repeated weakness under 1.1480 may open a path towards 1.1420 and 1.1380.

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