European equity markets hit a six month high yesterday as a combination of largely positive service PMI figures from China and the euro-area, and optimism in relation to US-China trade talks boosted market sentiment.
The major economies of Europe announced their final services PMI reports for March. The Italian, French and German reports came in at 53.1, 49.1 and 55.4 respectively - all updates came in higher than their respective flash estimates. The updates were a nice surprise compared with the gloomy eurozone manufacturing figures that were announced earlier this week.
After the European close yesterday, the German Economic Institute cut the German 2019 growth forecast to 0.8% from 1.9%. Traders might not take the announcement on board, because the FTSEMIB has entered a bull market, even though the Italian economy is in recession.
Larry Kudlow, economic advisor to the Whitehouse, said that China acknowledged issues like intellectual property theft and hacking. This was viewed as a big step forward in the talks, as previously, China denied the problems. These issues have been a major point of contention for the US, and the fact that they are being discussed, indicates that Beijing are serious about reaching a deal. Mr Kudlow said the Chinese trade negotiators are in Washington DC for three days, and they may stay longer.
The major US indices closed higher last night on the back of optimism surrounding the US-China trade talks, in fact, the S&P 500 posted a five day willing streak.
Overnight, it was announced that President Trump will meet with the Chinese vice Premier Liu He. Equity markets in Asia were subdued as it would appear that investors are playing the wait and see game.
The pound gained ground versus the US dollar yesterday as traders were hopeful the UK would be steered towards a soft Brexit. Theresa May, held a meeting with Jeremy Corbyn with the aim of making a breakthrough in the Brexit deadlock, and the meeting was described as ‘constructive’ and more meetings will follow. MPs narrowly voted in favour of asking Theresa May to request an extension to avoid a no deal Brexit, it will need to be backed in the House of Lords first, and then the EU will need to grant the delay.
Mark Carney, the governor of the Bank of England, described the risk of a no-deal Brexit as ‘alarmingly high’. The default position is a deal-no scenario, and the clocking is ticking for an alternative to be agreed upon.
The UK services PMI report was disappointing as the reading fell to 48.8, which was a sizeable drop from the 51.4 reading recorded in February. The update was the weakest since July 2016, and that underlines the negative sentiment. The UK services sector has been growing at a slower rate for the past two years, and now the growth has turned negative. The uncertainty surrounding Brexit is likely to be a factor.
German factory orders will be released at 7am (UK time) and the consensus estimate is for 0.3%, and that would be a big improvement on the 2.6% decline that was registered in January.
The ECB monetary policy meeting accounts will be released at 12.30pm (UK time) and traders will be paying close attention to the announcement seeing as the central bank might need to keep to keep policy loose for the foreseeable future.
US initial jobless claims will be released at 1.30pm (UK time), and dealers are expecting an increase of 5,000 to 216,000. Keep in mind, yesterday’s ADP employment report dropped from 183,000 to 129,000, which was well below the 170,000 forecast. The underwhelming ADP number, might be an indication that the US labour market is tightening up.
The oil market printed a fresh five-month high yesterday, before drifting lower, and then the Energy Information Administration (EIA) report added to the lower. According to the EIA report, US stockpiles surged by 7.23 million barrels, which was a big difference from the 425,000 draw that was expected.
EUR/USD – has been broadly pushing lower since early January, and if the negative move continues it might retest the 1.1176 area. Resistance might be found at 1.1448.
GBP/USD – has been driving higher since early December, and if it holds above the 200-day moving average at 1.2981, it might retest the 1.3380 area The 1.2775 area region might act as support.
EUR/GBP – while its holds below the 200-day moving average at 0.8840, its outlook is likely to be negative. 0.8471 might act as support. A rally might encounter resistance at 0.8800.
USD/JPY – has been largely been pushing higher throughout 2019, and if it continues it might target the 112.00 area. 109.55 might act as support.