The historic Inauguration of US President Obama was accompanied by widespread equity market weakness with the S&P 500 losing more than 5% yesterday. This renewed de-risking, primarily triggered by weak banking stocks, led to price action in FX markets that looked very similar to the deleveraging dynamics seen during the period from last September to November.
In particular, we saw broad based Dollar strength, weakness of peripheral currencies relative to core in Europe, little sign of particular EM underperformance relative to non-Dollar majors and some strength in low yielding currencies like the Yen and also the CHF. In the fixed income markets, flight-to-safety and increased risk of bank ‘bailouts’ led to further underperformance of peripheral Eurozone markets.
Sterling was above all the main market focus. Since last Friday, ahead the latest support package for the UK banking sector, the Pound has now lost about 6.3% against the Dollar, 3.7% against the EUR and a bit less than 4% on a trade-weighted basis. Moreover, up to this morning, the long-end of Gilt markets sold off in conjunction with the currency, creating a negative FX-rate correlation which is more typical for Emerging Markets with weak fundamentals.
On schedule today is a raft of UK data including labour market indicators, the MPC minutes and public sector net borrowing figures.
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