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European shares tread water as French political risks rise

market relief

market relief

With US markets off yesterday European markets had a fairly subdued session, but it was noticeable that French markets in particular were feeling the strain, particularly bond markets which saw a sharp widening of yield differentials as opinion polls showed an even closer race for the French Presidency with Marine Le Pen in quite a strong lead in the first round, with no clearer idea as to who she would be facing off against in the second round.

The long painful Odyssey that is the Greek debt crisis continues to rumble away in the background with Eurogroup chief Dijsselbloem insisting that Greece is on the road to recovery and anyone who thinks otherwise can talk to someone else.

As an exercise in self-delusion this is hard to beat given that the Greek economy contracted in Q4, though there was an agreement for the IMF and the EU agreed to return to Athens for technical talks. These talks are aimed at preparing the ground for further progress, and to bridge the gap between the IMF’s demand for debt relief, Greece’s refusal to implement any further austerity and the EU’s insistence on further austerity measures.

The sides still remain as far apart as ever with both the Germans and Dutch insisting on IMF involvement despite the latter’s insistence on debt relief. It is hard to see how the IMF position on debt relief squares with the position held by Germany, as further involvement from the IMF will have to confirm to their new position on debt sustainability.

Despite the political uncertainty of the past few weeks the economic data out of Europe has been by and large broadly positive, as increased global economic activity has translated into improvements in demand and rising prices. The latest manufacturing and services PMI data has proven to be a case in point with the latest flash data for February from France and Germany set to show that economic activity remains broadly sustainable across both sectors, with numbers in the low to mid 50’s for both.

Despite recent weakness, the pound has held up fairly well in the past few days, with weakness in the US dollar helping in that regard. We were also helped yesterday by the latest CBI factory orders data which showed the best level of activity in two years. Inflation expectations also came in higher, though some of that was related to the bad weather in Spain which caused the recent courgette and lettuce shortage.

The comments of Bank of England governor Mark Carney are likely to be scrutinised today when he testifies to MP’s on the contents of the recent quarterly inflation report, when the Bank of England upgraded its growth forecasts but left its inflation forecasts unchanged.

The governor must have been a touch relieved when last week’s CPI numbers came in below expectations at 1.8%, though he is still likely to face some difficult questions given the growing criticism of the Bank of England’s decision to cut rates in August last year, which it could be argued has amplified the recent sharp rise in inflationary pressures seen in the back half of 2016.

The fact that the rise in factory gate prices to 20.5% hasn’t filtered down into the headline numbers yet isn’t likely to let him off the hook with respect to some of the Bank’s recent forecasts which have been rather questionable to say the least.

US markets will return from their long weekend after closing at new record highs at the end of last week, as once again the question gets asked as to how long investors will give new President Trump the benefit of the doubt with respect to his new tax plans. We still remain no nearer to knowing the details of his phenomenal plans than we did a month ago, which rather begs the question as to whether the Emperor’s new clothes are simply an exercise in hyperbole.

EURUSD – continues to trade between support at the 1.0520 area, and resistance up near the 1.0720 area. A move through 1.0720 retargets the 1.08 area.

GBPUSD – has continued to find support in or around the 50 day MA at 1.2400. The lack of rebound is a concern which could see it break lower towards 1.2250. A move above the recent high at 1.2580 retargets the 1.2700 area.

EURGBP – having failed just above the 0.8580 resistance we’ve since drifted back, and as such remain vulnerable to a return to the 200 day MA at 0.8450. A break of the 200 day MA retargets the 0.8300 area.

USDJPY – having fallen short just below the 115.00 level we could well drift back towards the range lows at 111.60 in the short term.

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