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LCG Morning Call: Europe set for a flat open

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FTSE +6points at 7490
DAX +15 points at 13197
CAC +1 points at 5408
IBEX +2 points at 10143

European stocks sold off on Thursday, following a significant price chop earlier in the Japanese equity markets. Nikkei and Topix lost as much as 1%in Tokyo. Although the actual move is mostly believed to be a majorprofit-taking rather than a funded sell-off, the market sentiment deteriorated significantly across the globe. The Nikkei's sell-off may have caused someinvestors to question about the plausibility of the actual stock prices.

Even though the sell-off in the Nikkei was triggered by some kind of asynchronized feeling of discomfort above the 23000 level, the US stock traders had a plausible reason to go off in a sulk. The S&P500 (-0.38%), the Dow Jones (-0.43%) and Nasdaq (-0.58%) traded lower in New Yorkon fading tax reform hopes. Trumps very much expected corporate tax cuts could be less phenomenal than imagined so far, and may not be implemented before 2019. If so,dothe current stock prices are justified by the expectations of future corporatecash flows with a less dramatictax reform, or with no reform at all? If not,then it is worth noting that the mid-term technical support points stand at very distant levels given how far the Trump-rally stretched over the past year. As a reference, the Fibonacci 23.6% retracement level stands at 21678 for Nikkei 225, at 2462 for S&P500, at 22174 for Wall Street and at 7335 for FTSE 100.

This being said, there is no reason to panic just yet.The VIX index rose to 10.50%, as some investors were tempted to hedge their long positions for an eventual downside correction. Yet, it is certainly too early to tell if this first move could develop into a deeperdownside correction in the post-Trump rally. The VIX is still at very low levels compared to its historical trend.

Industrial metals edged lower in Shanghai, gold and the yen gain on risk-haven-like inflows. With no outstanding reason that explains the sudden reversal in the market mood, the risk-off rebound in safe-haven assets could remain capped. Gold should meet resistance at $1292/1293 (50-day moving average / upper Bollinger band on daily chart). The USDJPY is expected to convince buyers by112.83/112.70 (lower Bollinger band on daily chart / 50-day moving average).

European stocks are poised for a flat open.

The euro yields bounced higher on Thursday and pushed the EURUSD above its 200-hour moving average (1.1620). The euros actual strength will first be tested at 1.1680 (minor 23.6% retracement on September- November decline), then at 1.1760 (major 38.2% retrace). Below this level, the mid-term positive trend remains at riskwith the possibility of a slide to and below the key Fibonacci support of 1.1509, major 38.2% retrace on April September rise.

Cable fluctuated in a tight range below its 200-hourmovingaverage (1.3160). Brexit talks are hard and bear no fruit. Businesses involving big banks, become gradually impatient and could throw in the towel if there is no clarity regarding the post-Brexit operating conditions by early next year. UKs September trade balance and industrial production data are due today.Strong data could keep the GBPUSD above 1.3085 (November support), butcould barely boost the hawkish Bank of England (BoE) expectations provided the slower growth expectations in the next two years. The European Commission cut its UK growth forecast to 1.5% from 1.8% this year, and predicted 1.3% and 1.1% growth in 2018 and 2019 respectively. This is bad news for the BoE, which will likely remain stuck in alow growth - high inflation loopholeeven after having raised the interest rate by 25 basis points at its last meeting.Due next Tuesday, the UKs headline inflation may confirm a further acceleration to3.2% in October.

The information and comments provided herein under no circumstances are to be considered an offer or solicitation to invest and nothing herein should be construed as investment advice. The information provided is believed to be accurate at the date the information is produced.Losses can exceed deposits.

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About the author

Ipek Ozkardeskaya is a senior analyst at MBAex with a solid experience in the financial industry. She has strong technical background in economics and quantitative finance. Previously, she worked as a senior market analyst in London Capital Group, FX strategist in Swissquote Bank and as a client sales executive at HSBC Private Bank in Geneva. She also developed quantitative models in automatic trading as part of BCV’s Structured Products team. Ipek has a Master’s degree in Financial Engineering & Risk Management and a Bachelor degree in Economics from University of Lausanne.
Contributing  author since 11/09/2017

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