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Europe to open higher as G20 meeting starts

market relief

market relief

Banking shares which have been one of the sectors to bear the brunt of the stock market sell-off this year do appear to be continuing to show some signs of stabilisation. Last week we saw the sector post its first weekly gain this year, and yesterday’s strong rally as well its best one day performance this year could well mark the sectors second successive weekly gain in a row.

The catalyst for yesterday’s gains would appear to have been the surprise decision by Lloyds Banking Group to boost its dividend, which in a time of companies cutting dividends makes a welcome change.

Investors appear to have taken this as a sign that the direction of travel is a positive one for the bank, and that the worst of the PPI provisions are behind them, and while there are some caveats, notably concerns about economic uncertainty ahead of the June “Brexit” vote, and a fall in net income due to falling interest rates, the bank is not exposed internationally which means it can focus much more on its domestic base where it is cutting costs sharply.

The resulting rebound across the sector also helped Royal Bank of Scotland’s share price rally as well, though these gains could well come under threat if the bank disappoints this morning when it reports its full year numbers. Any negative deviation from the statements given at the end of January could see yesterday’s gains unravel quite quickly, particularly if the expected loss is worse than expected.

Away from the banking sector US markets saw a strong finish last night on reports that OPEC members had agreed with Russia to meet in March to discuss production caps.

Coming as the reports did 24 hours after the Saudi Arabian oil minister ruled out the prospect of production cuts and you have to wonder at the surrealism of it all, as the various oil producing nations tease the markets with their disunity.

As we come to the end of the week it is touch and go as to whether equities will be able to finish higher for the second week in succession, as we come to the end of the month, the same concerns that were dragging on sentiment a couple of weeks ago haven’t gone away, however there is a rising belief that the potential for further imminent US rate rises has diminished quite considerably.

Today’s and the weekend focus is likely to be on the upcoming G20 meeting in Shanghai coming at a time when concerns about the Chinese economy have roiled global markets.

The recent rebound in the yuan does appear to have assuaged concerns that the Chinese appear intent on sharply devaluing their currency, however given the timing and location of this week’s meeting, it seems to me merely good policy to avoid criticism from fellow G20 members. It would not be unexpected to see the yuan start sliding again once this weekend’s meeting is in the rear view mirror.

The recent call by the IMF earlier this week, followed by the OECD this morning, for the G20 to take bold action at their meeting this weekend could also be a factor behind the rebound in the latter part of this week, at a time when data showed that global trade slowed sharply in 2015, led largely by a slowdown in emerging markets.

It is highly unlikely that the G20 finance ministers will be able to deliver on anything more substantial than mere warm words and empty rhetoric, though I’m sure UK officials will somehow be able to shoehorn a mention into the statement about the risks of a “Brexit” as “Project fear” continues to get ramped up by the various vested interests in the global economy as well as big business.

As far as economic data is concerned we will be getting the second reading of US Q4 GDP and it is likely that it will get marked lower from 0.7% to 0.4% as the weaker data at the end of 2015 finds its way into the data.

January personal spending and personal income are both expected to show an improvement, of 0.3% on both measures, with the income numbers getting boosted by the various increases in minimum wage levels. The spending numbers look likely to improve if yesterday’s core durable goods numbers and January retail sales numbers are any guide, but the big question remains as to whether US consumers will finally start to spend that gasoline premium, which has yet to find its way into the US economy in the form of the retail sales numbers.

EURUSD – we’ve thus far been unable to get back above the 200 day MA at 1.1050, and until we do so the bias remains for a move lower and a test of trend line support from the lows in December, which comes in at the 1.0925 level. A break of this support would open up the 1.0700 area. A recovery through 1.1070 argues for a move back to 1.1200.

GBPUSD – this week’s drop below the 1.4220/30 and the previous low at 1.4080 increases the risk for a move towards the 2009 low at 1.3500. A monthly close below 1.4100 would also be the lowest close in over 30 years since the pound rebounded from its all-time lows at 1.0500 that same year. We need to see a recovery back through 1.4090 to stabilise.

EURGBP – has stalled out just below the 200 week MA which is the key resistance on the upside at 0.7945. A weekly close through here could well see further gains towards 0.8100. Support lies all the way back near the 0.7720 area.

USDJPY – the US dollar appears to be finding support around the 111.00 area for now, with twin support at this level for now. The technical break of 116.00 is a key indicator that could see a larger move lower to 106.00 in the longer term.  For this risk to diminish we would need to see a strong recovery back through the 116.00 area.

CMC Markets is an execution only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

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