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Europe to open higher, but geopolitics and earnings remain main focus

European markets enjoyed another decent week of gains last week, as did US markets despite an ongoing backdrop of geopolitical uncertainty, whether it be tensions over future trade relations, or an escalation of tensions between the US and Russia over the use of chemical weapons in Syria.

One of the main concerns last week was around the extent of the response by the US-backed coalition on President Assad of Syria’s forces and any Russian reaction to it. The firing of over 100 cruise missiles over the weekend on various targets, with little in the way of casualties, appears to be tempered with relief that while it may reduce the risk of an escalation in the short term, it in no way means that we might not get a counter response further down the line. As such markets here in Europe look set to open cautiously higher this morning after shares traded slightly firmer in Asia.

The US also appears to be complementing its military approach by focusing on the additional sanctions route, after UN ambassador Nikki Haley announced that further sanctions were being discussed on Russian companies who have dealings with Assad and the use of chemical weapons, with details likely to be announced by US treasury secretary Steve Mnuchin later today.

Despite the rebound seen in markets in recent weeks and the DAX and FTSE 100 hitting six-week highs on Friday, it remains to be seen whether the recovery from recent lows has the momentum to take us back above the 200-day moving averages, which we broke below just over two months ago.

In the US we’ve seen the beginning of the latest round of bank earnings get underway and despite some decent headlines numbers from JP Morgan and Citigroup markets still finished the day lower, albeit higher on the week.

JP Morgan in particular stood out, posting record numbers helped by the recent tax changes and recent market volatility, yet still finished the day lower, as concerns about loan growth to business raised concerns about future earnings potential. Bond trading was also a weak spot and looks unlikely to improve anytime soon with a flattening yield curve potentially hitting margins. The failure of the share price to close higher on the day also raises another important question, if record profits fail to inspire a move higher in the share price, then it rather begs the question what will?

Last weeks Fed minutes showed that US policymakers remain intent on raising rates further in expectation of higher inflation, which under normal circumstances should have boosted profits on the basis of a steeper yield curve. This doesn’t appear to have been the positive that markets had hoped it would be given that the yield curve rather than getting steeper and widening has gone the other way since the March rate rise, reducing the spread between short and long-term rates. Quite simply markets aren’t buying the narrative of multiple rate rises, as indicated by the 10 year 2 year spread narrowing to an 11 year low last week. If this continues it will inevitably compress margins even further in banks bond trading divisions further impacting profitability as well as turnover.

Inflation expectations are likely to remain in focus this week, with a number of Fed policymakers due to speak on monetary policy while we also have the release of the latest UK and Japanese inflation numbers, along with the latest China Q1 GDP, retail sales and industrial production numbers for March.

EURUSD – ran into resistance at the 1.2400 level last week, before drifting back, keeping the broader 1.2200/1.2500 range intact. We need to see a break below 1.2160 or a break above 1.2540 to suggest a strong move in either direction.

GBPUSD – last week’s rebound saw the pound make a high of 1.4296, however it was unable to close the week above its 200 week MA at 1.4250, which remains a key barrier for the pound. A weekly close above here has the potential to target a move towards 1.4500. We have support at 1.4080 as well as the 1.3970 area.

EURGBP – made a 9-month low last week at the 0.8625 area before rebounding. This move lower raises the prospect of a move towards the 0.8300 level and 2017 lows.  Only a move back above 0.8750 would stabilise and suggest a return to the 0.8800 area.

USDJPY – last week’s high at 107 80 has seen the US dollar slip back a touch, but while above last week’s lows at 106.60 the risk remains for a move towards 108.20. The 105.20 area remains a key support with a break below 105.00 opening up a move towards 103.00. 

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