Despite a turbulent week and strong finish on Friday, and a fairly decent US payrolls report, European stock markets still finished the week lower as concerns grow that the economic outlook that looked so strong at the beginning of the year, continues to look a little on the weak side, against a backdrop of increasing trade tensions, an increasingly uncertain political backdrop, and the formation of new governments in Italy and Spain.
The latest manufacturing PMI’s for May while still positive for all four major European economies have continued to slide back from their peaks, showing little sign of stabilising after the strong end to 2017. Tomorrow’s services PMI’s have also shown some worrying signs of similar weakness if recent flash PMI’s from Germany and France are confirmed.
This weakness along with rising political uncertainty could well complicate the European Central Bank’s plans to look at announcing the timing on easing back its asset purchase program by the end of this year. Nonetheless markets still look set to open the new week higher in the wake of last week’s decent US jobs report.
With respect to Italy’s new government, which should be ratified later today, and subsequent rebound in bond and equity markets after last week’s turbulence, only the most ardent optimist would argue that just because a renowned Eurosceptic in the name of Paolo Savona hasn’t become Italy’s finance minister that the EU’s problems have somehow lessened.
The new populist Italian government still has the same agenda of a universal basic income, low tax rates and ambition to reverse recent pension reforms that it had two weeks ago, with the same personnel, albeit in slightly different positions. Even with Giovanni Tria as finance minister their economic plains are likely to bring it into direct confrontation with the current status quo of balanced budgets and fiscal compact policy so favoured by the northern states of the EU.
Also, on the agenda will be this week’s upcoming G7 meeting which is likely to be one of those “fly on the wall” meetings that could see a lot of plain speaking take place in the wake of President Trump’s decision to implement the promised tariffs on steel and aluminium on Canada, Mexico and the EU. Is Trump’s assertiveness part of a wider strategy to show he is even handed with both friend and foe, before walking things back later this week, or are we really looking at a full-blown trade war?
China has already warned that any progress on trade that has been made in recent talks will be for nowt if new tariffs get implemented as announced last week by US officials.
While there has been plenty of talk about retaliation from after last week’s exemption expiry EU politicians will need to tread carefully to avoid an escalation, if Trump doubles down and targets the German car industry as part of his section 232 investigation into car imports into the US.
There wasn’t a lot to dislike about the latest US payrolls report but again it was one of those reports that while strong didn’t quell those concerns about lacklustre wages growth. The unemployment and underemployment rate both fell again, and though wages rose by 2.7% there was still signs that price pressures remained elevated as the latest ISM manufacturing report showed that prices paid were still rising strongly at their highest levels since 2011.
EURUSD – the rebound and bullish reversal from the May low at 1.1500 appears to be running into trouble at the 1.1730 level for now. We need to move through 1.1750 to target a move to the 1.1830 level. A move below the 1.1500 trend line support level opens up a move to the 1.1300 area.
GBPUSD – needs to push through the 1.3360 area to suggest a retest of the 1.3460 level. Support remains back at the May lows at 1.3200, with a break targeting broader support just below that at 1.3110 trend line support from the January 2017 lows.
EURGBP – another failure to hold above the 0.8800 area has seen the euro slip back with the risk of a retest of the 0.8690 area. The prevailing range remains intact with a break below 0.8690 targeting the 0.8640 area. The 200-day MA at 0.8850 should cap the upside.
USDJPY – while holding above the 50-day MA at 108.35, the prospect of a move back to the 110.30 level seems a realistic prospect.
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