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Europe to open higher on China trade optimism

If Wednesday was a positive day for the banking sector Thursday proved the exact opposite as European stocks came under pressure after French bank Societe Generale got clobbered after reporting a 20% slump in Q4 revenues, and touting the possibility it would have to close its proprietary trading unit.

US bank Morgan Stanley also disappointed on both revenues and profits, with fixed income trading also weak, which in turn pressured US markets until a report that the US might consider easing some trade tariffs against China, in a sign of good faith in the ongoing trade negotiations, caused markets to finish the session strongly. These reports suggested that Treasury Secretary Steve Mnuchin was pushing the idea, though chief trade negotiator Robert Lighthizer was lukewarm at best on it.

While there hasn’t been any solid confirmation that this might happen one way or the other, the mere prospect of further progress was enough to propel US markets to new one-month highs. This in turn should help markets here in Europe open higher this morning.

Currency markets still appear to be taking a positive view on all of the political turmoil coming out of the UK parliament as the pound continues to edge higher against the euro. Increasing talk around the prospect of an article 50 extension and a second vote appears to be encouraging some short covering, though for the most part the move higher appears to be more in hope than expectation, given the default position as it stands now remains that the UK leaves the EU without a deal.

Even without that scenario the pound appears to be gaining support on changing interest rate expectations around the euro, given the recent deterioration in euro area economic data.

While it’s not unreasonable for investors for take the view that the Bank of England won’t be raising rates anytime soon there is no expectation that they might soon be cutting them, or adding extra stimulus, Brexit concerns notwithstanding, expectations around ECB policy guidance is shifting.

What investors are starting to question is the ability of the European Central Bank, ahead of its meeting next week, to stick with its line that we can expect to see them raise rates this year. German ECB member Sabine Lautenschläger would have us believe that such a move is still a possibility, however the recent economic data from across that bloc shows that to be optimistic at best. It is much more likely that the ECB may well have to add extra stimulus in the absence of a pickup in either inflation or economic activity, and it is for this reason the euro is coming under pressure.

Earlier this week UK CPI inflation hit a two year low of 2.1%, opening up further the gap between wage inflation and prices in favour of the beleaguered Uk consumer. This could well have a positive impact on some part of consumer spending as we head into 2019. In November UK retail sales surged 1.4%, surpassing the most optimistic of expectations, largely as a result of Black Friday promotions and discounting.

The picture for December is unlikely to be anywhere near as good and given other similar surveys its quite likely that any spending could well have been left quite late, if it came at all. Expectations for December retail sales are for a decline of 0.8%, which given the 0.5% decline in October would mean that consumer spending may well have slowed quite markedly in Q4.

Today’s Canada CPI numbers for December are likely to reinforce the recent decision by the Bank of Canada to hold rates steady earlier this month despite the Federal Reserve’s decision to raise rates in December. On a month on month basis CPI is expected to slip 0.4%, largely as a result of the decline in oil prices, with annualised CPI expected to remain steady at 1.7%.

EURUSD – continues to look soft having fallen below the 1.1420 area earlier this week, and continues to drift lower with support coming in at the 1.1330 area, a trend line from the November lows of 1.1217.

GBPUSD – has continued to advance higher after this week’s dip to 1.2670 the pound has managed to push through the 1.2930 area, as it heads towards the 1.3000 area. A move through 1.2930 retargets the 1.3000 area. A move through 1.3020 could well signal further gains towards 1.3100.

EURGBP – has continued to decline this week pushing below the 0.8810 area as it heads towards the next support at the 0.8720 area. A move through here has the potential to retarget the November lows at 0.8660.

USDJPY – having pushed up through the 109.20 area, we could well see a further move towards the 110.30 area, on a break above 109.40.  Support is now expected to come in at 108.70 and 108.20.

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