Despite another week of rising yields, European markets still managed to finish ahead last week, as concern rises that various inflation measures are starting to tick higher again, having been in decline over the last few months.
The German DAX had a particularly good week posting its highest daily and weekly close in over a year, as confidence over falling energy prices and a more resilient global economy as China’s economy reopens helps to foster a slightly less negative outlook about growth prospects.
The FTSE 100 found itself lagging weighed down by underperformance in some of its more defensive names. US markets also managed to finish the week higher, breaking a losing streak that had lasted three weeks in a row. Both the S&P 500 and Nasdaq 100 managed to rebound after finding support at their respective 200-day SMAs.
Friday’s rebound came against a backdrop of a sharp decline in US 10-year yields which fell back from their highest level since November, above 4%. Friday’s ISM services report showed little sign that the big rebound in the US economy in January was a one-off, with the headline number falling slightly to 55.1, from 55.2, with further gains in employment to 54, and new orders rising to 62.4. Prices paid did slow, but still remained high at 65.4. As a leading indicator for this week’s delayed non-farm payrolls number for February, it’s a further indication that the US labour market continues to remain very resilient, with ADP and job openings (JOLTS) data also likely to add insight.
As we look ahead to this week the main focus, apart from Wednesday’s ADP, and Friday’s payrolls report, will be on Fed chair Jay Powell’s testimony to US lawmakers tomorrow and Wednesday where he is likely to be quizzed on how he sees the US economy in light of recent strong data, and what measures the Fed might feel inclined to take if the data continues to come in strong. It’s unlikely that he will give too many clues given how close to the next meeting we are, and the main takeaway is likely to be data dependence, however, don’t be surprised if markets pore over every single nuance just so that they can reinforce their own particular mindset.
We do have two other important rate decisions this week, namely from the RBA tomorrow, and the Bank of Canada on Wednesday, where the central bank may have cause to rue their decision to signal a pause at their last meeting given the strength of recent economic data.
Over the weekend the Chinese government signalled that this year’s GDP target would be 5%, which comes across as a little on the low side given that last year saw a 5.5% target under more difficult circumstances. It’s also potentially disappointing when it comes to the prospects for global GDP as a more restrained China means less potential for demand. The lower-than-expected target might also suggest that Chinese officials are less likely to push stimulus into the economy as it strives for stability over anything else. It could also be an acknowledgment that recent protectionist measures have damaged confidence in China as an investment opportunity, and consequently, investors could well be more cautious over the next 12 months.
This less-than-ambitious target appears to be weighing on commodity prices with Asia markets broadly positive as we look ahead to the start of today’s European session, and a positive start to the week.
EUR/USD – struggled to get above the 1.0700 area last week but has remained above the bullish reversal of last Monday at the 1.0530 area. We need to push through the 50-day SMA at 1.0730 to open up 1.0820. While below 1.0730, the bias remains for a test of the January lows at 1.0480/85.
GBP/USD – last week saw us ping between the 1.1920 area and the 200-day SMA, and the 50-day SMA at 1.2150 which remains a key resistance area. A break of 1.1900 retargets the 1.1830 area, while a break of the 1.2150 area is needed to retarget the 1.2300 area.
EUR/GBP – failed to push above trend line resistance at 0.8900 from the January peaks last week. Above 0.8900 targets the 0.8980 area. We need to push below support at the 0.8820/30 area to retarget the 0.8780 area.
USD/JPY – the failure to push through the 200-day SMA at 136.90/00 last week has seen the US dollar slide back. Support comes in at the 135.20 area. We also have interim support at 133.60. A break above 137.00 could see a move to 138.20.