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Theresa May and Wells Fargo Finally Put Markets on Track Again

By:
Mohamed Fathalla
Updated: Apr 23, 2017, 13:02 UTC

Looking at the GBP/USD chart we can see the technical side has reached the bottom to form an inverted head & shoulders, and crossing the neck line

Theresa May and Wells Fargo Finally Put Markets on Track Again

In my article “GREXIT is the Next BREXIT”  I have stated that when markets are moving in a certain way, then the big players knows something we don’t, especially if these are long term movements. By that time I referred to the rising wedge that was formed in the EUR/USD weekly chart, followed by the IMF annual meeting concerning the evaluation of Greek extended fund facility given in 2012.

The outcome statement of that meeting said that “Greece cannot grow out of its debt problem”, which was followed by the EUR/USD dramatic tumbling. That was a surprise for many, but it wasn’t for the big players, meaning giant brokers as JP Moran, Goldman Sachs, and others.

The conclusion was that there are two types of fundamental news. First is the open talk news (such as the FOMC meeting or employment data ), second is the conservative news type that no many traders or even the average analysts can predict. The last one affected markets dramatically during the last week.

Theresa May early election announcement, Wells Fargo big scandal and disappointing earnings report from Goldman Sachs were the big events of the previous week. The FTSE 100 formed a rising wedge that started from the referendum date and ended by the early election announcement. In this article I will try to illustrate the reflections of these actions on the market in the future.

Theresa May General Election Announcement

Last week, Theresa May shocked the markets by announcing early general election, despite her announcement on June 2016 that there will be no elections before 2020. She justified the decision by referring it to the opposing parties’. During her six minutes speech she exposed the ‘Liberal Democrats’ party – “they will grind the government business to the standstill”, she added that both ‘Labor party’ and ‘SNP’ said that they will vote against the final agreement of BREXIT.

Theresa May directed to the opposition by saying “it is your time to show that you are not dealing with politics as a game”. Since the early election is considered a bypass to the laws, it was necessary to have the approval of two thirds of the ‘House of Commons’ to trigger early election. Although conservatives forming 40% of the parliament, surprisingly the vote results came 522 members to 13 only. The news was instantly reflected  the GBP and the FTSE 100.

Goldman Sachs and Wells Fargo Lead a Correction

Meanwhile, investors expect a correction in US stock markets as the financial sector suffered this month after disappointing news.

Last week, a report published on the ‘Office of the Comptroller of the Currency’ revealed a scandal concerning Wells Fargo bank, the fourth biggest investment bank in the US. The report exposed the information that the bank used to increase its sales by opening around 2 million accounts to existing customers without their consent. A continuous complains came to the office in 2009. Also, it is important to mention that Warren Buffet is one of Wells Fargo investors, and according to CNBC his assistant stated that Buffet supports the board of administrators. The importance of that information is that the share price will stabilize sooner or later. Immediately after the disclosure of the news, WF share price tumbled from $56 to $51. After CNBC news price rebounded to $53.

Wells Fargo Chart
Wells Fargo Chart

Moreover, one of the biggest investment banks in the world, Goldman Sachs shocked the markets by missing both sales and earnings estimations combined this quarter. Major banks have achieved their earnings through fixed income revenues, which was the same reason why Goldman Sachs missed earnings estimations this quarter.

Goldman and Fargo are not the only stumbling banks. Despite the bright picture of the investment banking sector drawn by the media, charts show something else. JP Morgan and Morgan & Stanley are the biggest players on the stage. They missed earnings estimations; however,  shareholders opinion is reflected through the tumbling price even before the earnings season.

JPMorgan Chart
JPMorgan Chart
Morgan Stanley Chart
Morgan Stanley Chart

Markets Reaction – Technical Outlook

It is important to know how all these factors will affect the markets in the near future. First, let me draw your attention to the fact that since Trump’s inauguration markets consolidate and move irrationally.  US elections, BERXIT and the constant concern of more countries exit the EU caused markets a lot of turmoil. Stock markets are stretched and a correction is inevitable, especially European share markets. Investors pushed the Pound too low and estimated it under its real value. In order to get out of that trap something fundamentally should happen to loosen the strained market.

May’s announcement came in the right time as a reason for stocks markets to correct, as the markets get so stretched and can’t go higher.

In my weekly analysis published on April 4th, I put the FTSE100 futures on the top of recommended trades. After the long term wedge the FTSE 100 has formed, it dropped to 3 months low last week, as a result of May’s surprising announcement. The stochastic is still in the overbought position; in addition it is forming a clear divergence. The three months low drop that occurred last week didn’t reach the 23.6% retracementw which is a critical point. If the price will continue to drop in the week ahead, it will continue till the 38.2% level at 6680; however, if  price will rise, the price chart will form rising channel to continue till the 100%.

FTSE 100 Chart
FTSE 100 Chart

The FTSE 100 relies on the pound movement towards the coverage of its gap as well as the expected correction in the US indices as a result of the drop in the banking industry price.

The Sterling is the star of today. In the article “How to Solve the BREXIT Puzzle” I mentioned that the pound is in a dilemma due to the gap caused by BREXIT. The UK government played it very well and took advantage of this opportunity. Every piece of news concerning the BREXIT was used to lower the Pound; as a result, since June 2016, the pound caused markets to consolidate.

GBP/USD Chart
GBP/USD Chart

Looking at the GBP/USD chart we can see the technical side has reached the bottom to form an inverted head & shoulders, and crossing the neck line. The pair is expected to cover its gap between the retracement levels of 61.8% and 23.6% [1.385 – 1.3190].

Since I rely on qualitative theory [MFI],  red flags around the British Pound have been raised. The pair might move forward before it starts to retreat again after the French election.

This idea applies on the EUR/GBP as well. The Pair had reached its top just one week prior the election; on the other hand, the pound is at the bottom versus USD and about to break the falling wedge versus NZD.

EUR/GBP Daily Chart
EUR/GBP Daily Chart
GBP/NZD Chart
GBP/NZD Chart

With French election on April 23, next week will be significant to the markets. On the long term, a lot of SWAPs and hedge funds will bet against the Pound. Early UK elections , the expected US share markets correction ( investment banking sector) and the anticipated French election results will all turn the markets on the right track again.

About the Author

Mohamed Fathallacontributor

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