Having come off the back of 3 successive monthly declines, there was always the possibility that we might see a bit of a rebound at some point.
The surprise was that it came in the last 3-days of last week at a time when the war between Israel and Hamas shows little sign of being dialled back.
There were a number of catalysts, with the Federal Reserve being at the heart of them, while the US bond market also saw a big rebound after the US treasury outlined lower than expected bond issuance for the quarter. Throw in a goldilocks non-farm payrolls report and a couple of disappointing US ISM reports, and US 10-year yields saw their biggest weekly decline since March, as markets started to price in the prospect of rate cuts sometime in the summer of next year.
While the markets were revising their estimates for when US rates might start to get cut, economic data in the UK and Europe pointed to an even deeper economic malaise, as it slowly became apparent for all of the hawkishness of the ECB, as well as the Bank of England, that both of them are also done on the rate hike front, and that we could start to see rate cuts from the ECB as soon as Q1 next year, with the Bank of England sometime in H2 of 2024.
This shift was reflected most noticeably on the FTSE 250 which had its best week this year, rising 6.6%.
US markets also underwent a strong rebound, undergoing their best week this year, the Nasdaq 100 closing up 6.48%, and the S&P500 finishing the week up 5.85%, while the smaller cap Russell 2000 closed the week 7.5% higher.
Friday’s payrolls report, unlike September, when US jobs surged by 297k, saw jobs growth slow in October to 150k, the weakest number this year, while the unemployment rate ticked higher to 3.9%, in a sign that the US economy is now starting to slow in a manner that will please the US central bank.
Crude oil prices also came under pressure, sliding for the 2nd week in succession and are now back at the levels they were prior to the Hamas terrorist attacks on Israel, after the leader of Hezbollah in Lebanon claimed of no prior knowledge of the attacks in a move that suggested little appetite to get involved more deeply in the conflict.
This reluctance to become more involved beyond rhetoric has raised the hope that the conflict will remain contained for the time being, which means concerns over demand have moved back into focus, against the back drop of weakening economic data.
Chinese economic numbers still look weak if recent PMIs are any guide and with October trade numbers due tomorrow the outlook in the worlds 2nd biggest economy looks lacklustre.
In Europe, today’s services PMIs are expected to reinforce this weak demand outlook, having already had sight of the flash numbers from Germany and France at the end of October.
In France and Germany, the flash services activity showed they were solidly in contraction territory at 46.1 and 48 respectively, with Spain and Italy expected to also remain lacklustre at 49.3 and 47.7, down from 50.5, and 49.9 in September.
Asia markets have continued the positive theme from Friday, while European stocks look set to open mixed as they look to consolidate last week’s gains.
EUR/USD – pushed up beyond the 50-day SMA as well as the 1.0700 area, potentially opening up the 1.0800 area and 200-day SMA, which is likely to be a tough nut to crack. Support likely to come in at the 1.0670 area. Below 1.0520 targets the 1.0450 level
GBP/USD – broke through the 1.2200 area last week as well as the 50-day SMA at 1.2300, opening the prospect of a move towards 1.2420 and the 200-day SMA. Support at 1.2270/80.
EUR/GBP – dropped through the 0.8680 area with a break now targeting the 0.8620 area. We have resistance at the recent highs at 0.8740.
USD/JPY – continues to slip back from the resistance at 151.95, dropping below the 149.80 area. 3 successive daily declines could see a move back to the 148.75 level, or the 147.85 area.