It turned out to be another day of records yesterday as both the S&P500 and Dow Jones closed at new all-time highs, as investors bet that the Federal Reserve was on the cusp of cutting interest rates for the first time since 2008, with bond markets pricing in a move as soon as next month.

In spite of all of this exuberance it should be noted that the US Russell 2000 has been unable to get remotely close to the record levels of last year, which would appear to suggest that this risk rally is more selective than most, with investors focusing more on the bigger cap stocks.

Markets in Europe have also been caught up in the euphoria, on expectations that the European Central Bank also has their back, after outgoing ECB President Mario Draghi committed to the prospect of further easing measures, though the gains here have also been slightly more tempered, while markets in Asia this morning have slid back a touch ahead of the weekend, with the Nikkei 225 in particular coming under pressure after finding itself unable to move beyond its 200 day MA.

These comments about the European Central Bank being prepared to embark on a new round of easing measures may have attracted the ire of the US President, as well as catching the markets off guard earlier this week, but they could well soon be tested in earnest unless there is an imminent pick up in some of the data coming out from Germany and France.

For several months now manufacturing activity in Europe has been abysmal, but that’s been true in general across the world, so it’s not a uniquely European problem. In Germany the sector has been in contraction for five months and this looks set to extend into six months, albeit we could see an improvement from May’s 44.3, which was almost a seven-year low. French manufacturing was slightly better, coming in at 50.6 on May and is expected to improve to 51.6.

The services sector on the other hand has performed slightly better over the past few months and this is likely to continue to be the case with France services PMI for June expected to improve to a six-month high of 51.6. Germany is expected to soften slightly from a fairly decent 55.4 to 55.3.

The decline in manufacturing is in stark contrast to the resilience of the services sector and suggests that the underperformance in manufacturing is down to concern over trade, of which the German economy is particularly exposed.

Furthermore, earlier this month trade tensions ratcheted up a notch when the US President threatened to slap tariffs on all Mexican imports, from June 10th due to concerns about immigration on the US, southern border, which probably raised concerns that the EU was likely find itself in the crosshairs in due course.

While the threat of tariffs was deferred, the delay in confirming this is likely to have had a chilling impact on some of the recent US data for June, as manufacturers delayed output over concern about higher costs. This has already been borne out by some weak Philadelphia Fed and Empire manufacturing numbers, earlier this week.

This is expected to feed into a weak US flash manufacturing PMI later this afternoon. Expectations are for an unchanged reading of 50.5 in May, however don’t be surprised if the indicator contracts below 50. The services sector is expected to improve modestly to 51, from 50.9.

The pound paused a little after the Bank of England kept rates on hold, and downgraded their growth forecast for Q2 to zero. All the pre rate meeting hawkishness that we heard from the likes of external MPC member Michael Saunders and chief economist Andy Haldane was notable by its absence.

The pre-Brexit pop for Q1 appears to have given way to a pullback in economic activity while the political theatricals in Westminster distracts politicians from the business of assuaging business concerns about how events will play out between now and October.

Consumers also appear to have become more cautious, with retail sales declining for the second month in a row in May.

Crude oil prices also appear to have put in a short term base after yesterday’s sharp gains, hitting their highest levels this month, on the back of increasing tension between the US and Iran, after Iran downed a US drone, and President Trump kept his options open as to whether the US might respond.

Gold prices have also soared in the last few days, breaking out of the doldrums of a five year trading range, and breaking above the $1,400 an ounce level for the first time since August 2013.

EURUSD – having moved above the 1.1270 area we look on course for a test of the 200 day MA at 1.1370. The 1.1270 area should now act as support, however while below 1.1370 a retest of the lows near 1.1110 can’t be ruled out.

GBPUSD – could well have seen a short-term base at 1.2505, however we need to see a move back through the 1.2760/70 area to shift the emphasis to the upside.

EURGBP – feels like we may have topped out at 0.8975?  A move through the 0.8870 level could well open up a move towards the 200-day MA at 0.8780, with 0.8820 interim support. While 0.8870 holds the risk is for a return to the highs this week.

USDJPY – the US dollar has continued to slide, breaking below the support at the 107.70/80 area we now look set to target the 106.00 area. We need to see a move back above 107.80 to retarget the 108.80 peaks.

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