As we come to the end of what looks set to be another positive month for European equities the question being posed is how much further can this year’s rally take us, with the DAX currently up over 10.5% year to date, and the FTSE 100 up almost 6.5%?
US markets on the other hand could well finish the month lower, their recent progress starting to get stunted by the prospect of several more rate rises from the Federal Reserve, after recent US economic data surprised to the upside. While the S&P 500 is only up 3.6% year to date, the Nasdaq 100 is higher by over 10%, while the Dow is flat.
After the US-inspired declines at the end of last week, European markets saw a fairly decent start to the new week yesterday, buoyed by some resilient earnings numbers, as well as a series of broker upgrades helping to support early gains.
US markets also started the week positively, however the positive momentum soon gave way to caution as they closed well off their highs of the day, even as US 2-year yields pared back some of their recent gains, having set another new multi-year high at 4.85%, before slipping back. Asia markets have seen a rather quiet and mixed session, and markets here in Europe look set to open modestly higher. The resilience in inflation remains the key worry for investors now after last week's hotter-than-expected US inflation numbers.
Attention now turns to Europe this week, starting with France later this morning as we get an early sight of flash CPI for February, which is expected to come in higher. Monthly CPI is expected to rise by 1% with year-on-year set to remain steady at 7%, with the French economy set to be confirmed as growing by 0.1% in Q4. Tomorrow we’ll get the Germany flash CPI, which will then be followed by EU flash CPI on Thursday. We already know that the ECB intends to hike by 50bps in March, as they’ve already pre-committed to it on multiple occasions, but what comes after that remains cloaked in uncertainty.
In the US we get the latest consumer confidence numbers for February, which are expected to show an improvement from January, coming in at 108.5, up from 107.1. The latest Chicago PMI is also expected to improve from 44.3 to 45.7. The US dollar also slipped back, helping to support yesterday’s modest rebound in equity markets, sliding back from seven-week highs, with the pound being one of the main beneficiaries of yesterday’s weakness, rebounding from a key technical support area, with a bout of short-covering.
Optimism over the UK economy also helped after it was announced that a long-running trade sore could well be confined to the history books, with agreement on the fractious Irish border issue. All the focus will now be on the DUP to see whether the new arrangements pass muster with them. Later this afternoon we have comment from Bank of England officials John Cunliffe, chief economist Huw Pill, and external MPC policymaker Catherine Mann, who has become even more hawkish given current trends around increasingly sticky inflation.
EUR/USD – found some modest support at the 1.0530 area, but while below the 1.0620/30 area the bias remains for a move test of the January lows at 1.0480/85, with the 200-day SMA at 1.0320 below that.
GBP/USD – found support once again at the 200-day SMA at 1.1920/30 yesterday. A break of 1.1900 retargets the 1.1830 area. Resistance currently at the 50-day SMA at 1.2150.
EUR/GBP – ran into resistance at the 0.8830/40 area and has since slipped back. Support comes in at the 0.8780 area a break of which opens up the 0.8720 level.
USD/JPY – running into resistance just below the 200-day SMA and Kumo cloud resistance area at 136.90/00. Interim support at 133.60, and below that at 132.60, and 50-day SMA.