Last week saw new record closes for the MSCI World index, FTSE100, FTSE250, German DAX as well as the major US markets, while the Nikkei225 enjoyed its highest levels since 1996, as investors continue to adopt an optimistic outlook for the global economy, putting aside concerns about geopolitics in their hunt for returns.
While all the talk is of a possible easing back from the current easy monetary policy stance the fact remains that even with a moderate retreat from the US Federal Reserve, the European Central Bank and the Bank of England the fact remains that interest rates will still be nailed to the floor on a historical basis.
That’s not to say that we might not see some sort of policy mistake, but it would need to be a real doozy, and for now that doesn’t seem likely at this point.
It is more likely to be a geopolitical intervention that could upend the apple cart and we do have a number of events to keep an eye on this week, not to mention a couple of electoral setbacks for the political status quo in Austria and Germany at the weekend.
In a blow to German Chancellor Angela Merkel, as she looks to build a stable coalition government for the next four years, her party suffered a setback in a regional election at the weekend, coming second to the SPD, while in Austria it looks likely that politics there has shifted to the right which is likely to herald a much more uncompromising tone towards the EU, when it comes to matters of immigration.
The focus of attention is also likely to be on Spain as the clock ticks down on Madrid’s warning to the Catalan President Carles Puigdemont to clarify his position on last week’s speech when he stated that the Catalans had won the right to declare a Republic, but then postponed the result in an effort to kick start talks on a new relationship.
The Catalan president is in a difficult position, if he backs down then the Catalan government will probably split and we could well see new elections, and if he declares independence then he risks arrest as well as potentially forcing Madrid’s hand in triggering article 155 of the Spanish constitution and imposing direct rule, a step that could well trigger significant unrest.
Attention will also be on this week’s EU summit in Brussels in the wake of last week’s warning from EU chief negotiator Michel Barnier that the Brexit talks are deadlocked, though it was admitted there had been some progress. The performance of the pound last week suggests that markets think this is the latest in a bout of political posturing, with traders more interested in this week’s UK economic data, and central bank testimony from Carney, Tenreyro and Ramsden. Ultimately we could well get some movement on the subject of trade talks over the course of the next few days.
It is becoming increasingly obvious that the subject of trade and money are inextricably interlinked, particularly where the Irish border is concerned and the refusal of the EU to engage on this is causing some concern, particularly in Ireland.
It’s also set to be a big week for China with the latest Q3 GDP numbers, as well as September industrial production and retail sales data, as well as looking to its upcoming Communist Party Congress, where we could well get further clues as to the type of policy stances President Xi will adopt over his next five years, as China’s President.
With central bankers the world over scratching their heads as to how long inflationary pressures are likely to remain benign they may well be starting to see the end of this benign environment if this morning’s latest inflation data from China is anything to go by. While CPI came in as expected at 1.6%, factory gate prices surged to 6.9%, a six month highs, well above expectations of 6.3%, helped by surging commodity prices. Given their lag could this increase be any early indicator of global inflation starting to show signs of returning?
Oil prices are already starting to look well supported though skirmishes between Iraqi and Kurd forces around Kirkuk may well have something to do with that as concerns about supply disruption in the Kurdish region return.
EURUSD – the rally off the 1.1670 lows this month has found resistance just below the 1.1900 area, and has slid back. We need to break above the 1.1920 area to retarget the 1.2000 level. We have interim support at the 1.1780 area and below that near last week’s lows at 1.1670.
GBPUSD – last week’s rebound from the 1.3020 area found resistance at the 1.3340 area, but we still remain on course for a move towards the 1.3420 area. We still remain in the broader uptrend while above the 1.3000 level and a return to the highs last month.
EURGBP – last week’s bearish key day reversal from the 50 day MA at 0.9020/30 opens up the potential for a correction lower towards the 0.8820 area. We have resistance at the 0.8930 area which needs to hold for further weakness.
USDJPY – the failure at the 113.40 area last week has seen the US dollar slip back. Having slipped back below the 112.00 area the risk is for a move towards the 110.80 area in the short term, with interim support at the 111.30 level.
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