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Europe to open a little weaker after US rally fizzles

European markets had a decent day yesterday, while US markets made new record highs in the aftermath of the weekend senate vote on tax reform. At one point the Dow had made gains of over 300 points, however it gave up over half of those gains to only close higher by 124 points.

The remaining US benchmarks weren’t so lucky with the S&P500 and the Nasdaq both closing below their Friday close as tech stocks sold off.

This inability to hold onto the bulk of the gains in the US ought to be a bit of a red flag, particularly in the case of tech stocks like Apple, Alphabet, Microsoft, Facebook and Amazon. While it makes some sense that finance stocks reap the benefits of a rise in yields and tax reform it’s somewhat counterintuitive that it should be at the expense of tech stocks. Let’s remind ourselves how much in the way of tax dollars these big tech companies keep offshore.

According to SEC filings Apple has almost $250bn overseas, Microsoft has in the region of $130bn, while Google parent company has about $60bn, yet these tech giants have started to show signs of share price fatigue in recent days, despite the prospect we could start to see some of the profits come back.

Given last night’s weakish US close we can expect to see European markets open slightly lower this morning, ahead of the latest November services PMI’s which are expected to show a continued resilience to the recovery being seen across the euro area, as well as the UK.

Starting with Europe we have the latest services PMI’s from Spain, Italy, France and Germany. It is expected that we’ll see improvements across the board with readings of 55.2, 53.4, 60.2 and 54.9, with France outperforming strongly from an October number of 57.3.

In the UK there was some disappointment that after all the early optimism yesterday that we didn’t get a deal on transitioning across to start talking trade, however the upbeat tone exhibited in the press briefing between European Commission President Jean Claude Juncker and Prime Minister May and the agreement to extend the deadline would appear to suggest that a deal might be possible.

The deadlock would appear to be around the Irish border issue, and yesterday’s firm rejection by the DUP of any sort regulatory alignment that sets Northern Ireland apart from the rest of the UK is likely to be a non-starter. What is more surprising is that markets bought into it given the predictable opportunistic response of the Scottish and Welsh governments, that they would expect to receive similar treatment.

The reaction of the pound was also a bit puzzling, rising in expectation of a deal when the long term effects of such a deal could destabilise the constitutional make-up of the United Kingdom. 

The big question now becomes as to what constitutes “satisfactory progress” in order to start talking trade, though an obvious fudge would be for trade and the Irish border talks to be linked in order to start to close the gap. 

On the data front, having seen two decent numbers on manufacturing and construction PMI’s for November, it is hoped that today’s services number will complete a nice hat-trick, though expectations are for a bit of a slowdown from Octobers 55.6 to a number in the region of 55.2.  On the retail front the latest BRC retail sales numbers for November showed a rise of 0.6%, up from a 1% decline in October but the expected uptick in Black Friday sales doesn’t appear to have happened this year as consumers tire of this particular US import. Food sales drove most of the increase while non-food spending slipped back.

EURUSD – continues to find it heavy going above the 1.1950 area with resistance up near the 1.1970 area. We have solid support down near the lows last week at 1.1810, and also below that at 1.1710.

GBPUSD – has found the 1.3550 area a tough nut to crack with another failure yesterday. The current up move could be vulnerable to a sell-off at these levels though we do have support at the 1.3420 area and 1.3320. We need to see a break soon to target longer term resistance behind that at 1.3660, the September highs or we could go for a move down to 1.3300.

EURGBP – made a four week low yesterday at 0.8755 but needs to take out the November lows at 0.8735 to suggest the possibility of further losses towards 0.8600. We have resistance back at the 50 day MA at 0.8880, and above that at the 0.8980 area.

USDJPY – failed just shy of the 113.20 level yesterday which keeps us vulnerable to a pullback towards the 111.60 level. We need to push beyond the 113.20 level to open up a move towards the 114.00 area.

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