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European markets set to open lower after weak US finish

The return of US and UK markets yesterday saw a little bit of weakness creep in as we head into month end and what has been a positive month for markets on both sides of the Atlantic, with records broken on an almost daily basis, with Amazon grabbing the headlines as its share price moved above $1,000 a share for the first time ever.

This soft tone looks set to be carried over this morning, though the latest Chinese PMI data for May do appear to have shown some signs of stabilisation in May after a little bit of weakness in April. Manufacturing PMI came in 51.2, unchanged from the April reading, while non-manufacturing PMI improved to 54.5 from 54. 

Recent weakness in European markets has been a little tough to square with the continued improvement in economic data that has come out of Europe since the beginning of the year.

Strong economic surveys from Germany, France, Italy and Spain suggest that the improvements seen in Q1 will be carried into the rest of the first half of this year, particularly since most of the political risk is now in the rear view mirror.

With no surprises expected from Germany’s election the focus has shifted to events in Italy and the prospects of when the next election is likely to take place here, particularly since politicians across Europe appear no nearer sorting out the mess that is Italy’s banking system.

This may be one factor holding back investors, while events in Greece appear to be unfolding in a depressingly familiar way, with EU creditors once again moving the goalposts on what is required in order to look at a deal on debt relief and the allocation of more bailout cash.

Putting to one side these risks ECB President Mario Draghi has continued to insist that inflation remains too low and that economic risks remain tilted to the downside reiterating these views at the beginning of the week. With economic indicators showing economic activity at multi year highs this sort of argument is becoming much less credible, particularly when rates are deep in negative territory and stimulus is running at €60bn a month.

Despite the economic improvement seen this year unemployment does remain a thorny problem in some European countries, Italy in particular, where unemployment data released later this morning is expected to come in at 11.6%, with youth unemployment around 35%.

German unemployment on the other hand is expected to fall to 5.7% from 5.8%.

On the inflation front the latest CPI data for the EU is expected to show that prices cooled a little in May, after a big jump in April to 2%, falling back to 1.6%.

Core prices which showed a big jump from 0.7% to 1.2% in April are expected to fall back to 1% in May, perhaps reducing some of the urgency from some parts of a paring back of the ECB’s stimulus program.

In the UK while the pound has recovered some ground after its wobble at the end of last week, there is a slightly more cautious attitude as a result of those narrowing polls, with another survey showing that the prospect of a hung parliament has also increased, which has also acted as a bit of a weight around sterling’s recent progress.

Today’s economic data releases are expected to show there is increasing evidence that lending is continuing to slow with today’s latest consumer credit and mortgage data expected to show a slight slowdown in April, though we have seen consumer confidence for May show some improvement, coming in at -5, from -7 in April.

EURUSD – the key day reversal seen last week has thus far seen a decline towards 1.1105. We still remain vulnerable to a drift back down to the 1.1020 area in the short term. There remains significant resistance at the November highs around the 1.1300 area.

GBPUSD – the recent decline has so far managed to hold above the 50 day MA as well as the 1.2750 support area and while it does so the uptrend and retest of the 1.3040 area remains intact. A consolidated move through 1.3050 has the potential to target the 1.3320 area. Only a move below 1.2750 argues potentially back towards the 1.2600 area.

EURGBP – the euro has thus far found the air a little bit thin above the 0.8720 area, but while we remain above the 200 day MA at 0.8600 the risk remains for a move towards the March highs at 0.8790. A break below the 0.8600 area could well open a return to the 0.8540 area and the 50 day MA.

USDJPY – the failure just below the 112.40 area last week has seen the US dollar slip back, and we could see a retest of the 110.20 area. Below 110.00 retargets the 109.20 area, while a move through the 112.40 area could well see a move back towards 114.00. 

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