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Subdued start expected as stocks look for direction

European markets got off to a subdued start to the week after the gains seen in the aftermath of Friday’s US non-farm payrolls report, while US markets underwent a similarly lacklustre session in the wake of weekend comments from US Treasury Secretary Janet Yellen, that she welcomed the prospect of higher rates if the economy warranted it.

The modest underperformance in the main US benchmarks was predominantly driven by tech stocks; however, the weakness was fairly modest and not really prompted by anything significant even when accounting for the noises about tax reform at the G7 at the weekend. The Russell 2000 outperformed once more hitting a one month high, with meme stocks continuing to surge higher, with the likes of AMC Entertainment and GameStop posting solid gains.

In the short term, while the weekend statement about a harmonisation of tax rates was noteworthy, it is still well away from being in anyway a realistic short-term proposition, and markets know this. Politicians can talk the talk as much as they like, but they remain a long way from walking the walk when it comes to a harmonisation of tax policy. Investors' main concern appears to be over short-term inflation risk and whether rising prices are likely to be transitory in nature, with the main focus on this week's US CPI data for May.

As European markets get set for another subdued open, today’s focus is set to be on the latest German industrial production numbers for April and June ZEW survey of investor expectations. Having seen German factory orders for April post a decline of 0.2% yesterday, the industrial production numbers aren’t expected to be much better, with a modest rise of 0.2% expected. The latest German ZEW survey is expected to see an improvement to 86 from 84.4, with the DAX trading close to record highs.

In the US the latest JOLTs survey is expected to see another increase in job openings to 8.2m in April, up from 8.12m in March, as US businesses struggle to fill a growing number of vacancies at a time when US consumers have seen two big fiscal handouts in the first quarter of this year. It's also noteworthy in light of Friday's payrolls miss, that there are still 8 million fewer Americans in work now than pre-pandemic, with a participation rate which is also 1.8% below where it was in February 2020.

Forex snapshot

EUR/USD – the euro has continued to push up from Friday's 1.2104 low, with the prospect we could head back to the May highs at 1.2266, which is the next resistance level. A move below 1.2100 opens up the 1.2050 area. The highs this year at 1.2345 remain a key level and barrier.

GBP/USD – the rebound off last week’s low at 1.4080 needs to push up through the 1.4240 area to target the 2018 peaks at 1.4375. A failure to overcome 1 4240 keeps the bias towards 1.4000.  

EUR/GBP – while above the 0.8560 area the risk remains for a return to the 0.8640 area. A break above 0.8640 retargets the 0.8670 level. A break below 0.8550 opens up the recent lows at 0.8480.  

USD/JPY – last week’s failure at 110.35 has seen the US dollar slip back with a move below 109.20 opening up the potential for a return to the 108.60 area.

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