In the last four weeks the FTSE 100 has gone precisely nowhere. At the end of the week ending 18 June, and just before the original date the UK economy was supposed to unlock, it closed at 7,008. Last Friday, as we get set for today’s supposed 'Freedom Day' unlocking, the FTSE 100 closed at 7,008.
In Europe the picture isn’t that much different, with the DAX a little bit higher, and the CAC 40 a little bit lower. Back in June the markets were absorbing a surprise change of tack from the Federal Reserve, with some members of the FOMC being slightly more vocal about the prospects of tapering as well as rate hikes. Fast forward four weeks and not much has changed, although some central banks have started to lean in a similar direction, as last week the RBNZ and Bank of Canada announced the beginning of the end of their own asset purchase programmes.
They were also joined by two Bank of England policymakers, deputy governor Dave Ramsden, and external MPC member Michael Saunders, who also articulated their unease at what appears to be happening with inflation, saying that the case for considering the paring back of some stimulus measures was rising. Despite this more hawkish tone, long-term yields have actually fallen in the last four weeks with the US 10-year yield 14 bps lower, indicating that bond markets either don’t share concerns about inflation, or that they are starting to price in a slowdown in the global economy.
These concerns may well be behind last week’s decline in global markets, which, despite new record highs for the DAX, Stoxx 600, S&P 500 and the Nasdaq, saw US markets post their first weekly decline in three weeks, with markets in Europe also sinking back to the bottom of their recent ranges. This weakness is expected to translate into a softer European open later this morning after Asia markets got the week off to a negative start on concern over rapidly rising global Delta variant cases, as well as a slowing economic outlook.
Another concern for markets appears to be the outlook for future earnings growth. Last week’s earnings reports have by and large been positive, but attention is now shifting to what comes next in terms of the outlook, as Covid cases rise, and here the economic picture is less clear. There was a great deal of optimism over the summer reopening, however as we look ahead to the rest of the year and look at how Delta variant infections are rising, some of that optimism is dissipating, prompting the question as to where we go next for Q3 earnings expectations.
One of the big drivers of inflation concerns over the past few months has been the steady rise in oil prices, as concerns about demand overshooting supply helped to drive prices to three-year highs. At the weekend Opec+ appear to have put their differences to one side and agreed a deal to increase output by up to 400,000 barrels a day on a monthly basis starting in August, and continue until production has been restored to the level it was pre-pandemic.
As we look ahead to this week, the main focus is likely to be the latest ECB rate decision on Thursday, which is expected to see a policy change to the forward guidance on the PEPP programme, which may not get unanimous approval from some of the more hawkish members of the governing council. Of course, in light of the recent tragic events with respect to the flooding in Germany, Belgium and the Netherlands, these guidance changes might get a more sympathetic hearing than was perhaps the case two weeks ago. German public spending was already on an upward track as a result of the pandemic, and recent events are likely to see this go even higher, as the government looks to rebuild vast swathes of its heartlands in the coming months and years.
In March, Germany planned to borrow €240.2bn this year, €60bn more than originally planned to help mitigate the pandemic. At the same time, finance minister Olaf Scholz was also making plans for 2022, and extra borrowing of €81.5bn, taking the total to €320bn over the next two years. This number looks set to go higher given that Germany’s debt brake allows for net borrowing to increase in the event of an emergency. Recent events clearly meet this classification, and while there have been calls for a return to frugality once Covid has passed, there is the distinct likelihood that the floods could alter the whole dynamic when it comes to balanced budgets.
EUR/USD – we have support at least week’s lows at 1.1770, and resistance at the 1.1880 level. We need to move through the 1.1880 level to signal a move to the 1.1975 area. A move below 1.1700 reopens the 1.1612 area.
GBP/USD – decent support down at the 1.3730 after falling below 1.3800 last week. We also have support at the 1.3670 area and 200-day MA. Resistance remains at the 1.3920 level and the highs this week. Above 1.3920 retargets the 1.4000 area.
EUR/GBP – has continued to push higher after last week’s low at 0.8504. Appears to be in a short squeeze towards the 0.8600 level. Nonetheless it doesn’t change the fact that the bias remains for a move towards the 0.8480 area.
USD/JPY – the slide off the 110.70 area found support at the 109.70 area, while we also have cloud support just below that at 109.53. A move below 109.50 targets 109.20. A break above 110.70 targets the 111.20 area