Having got the week off to a positive start on Monday, European stocks gave up some of their gains in what was a negative session across the board yesterday.
Sentiment continues to remain extremely fickle, prone to the ebb and flow of inflation expectations, followed by fears that central banks will over react in combatting said inflation, which is then followed by concern about what that might do to global growth.
This argument which the market appears to be having with itself, over whether we see a recession, or a soft landing is likely to become a lot clearer, over the next week or so, starting with US CPI on Friday, followed by PPI and the Fed meeting a week from now.
It’s been very much a case of rinse and repeat of the same narrative over the past few weeks, and while we’ve seen a modest rebound in equity markets, there remains a significant overhang of uncertainty as to how much further this rebound has to go.
US markets started yesterday very much on the back foot, however as European markets closed, and US 10-year yields fell back below 3%, US stocks began to recover, finishing the day higher for the second day in a row.
Yesterday’s soft session was primarily driven by weakness in retail stocks after a surprise profit warning from US retailer Target, however despite the concerns over tighter margins and lower profits, share prices finished the day well off the lows of the day.
In amongst all of this, much depends on the US consumer, who has up until now looked resilient, while at the same time lacking in confidence.
Last night’s April consumer credit numbers saw another big number, with $38.07bn, down slightly from March’s record $47.34bn, and the third successive month of borrowing above $30bn. The last three months have seen an explosion in credit, which runs counter the narrative of a high savings rate. Revolving credit was up 19.6% to over $1.1trn.
On the data front today, it’s a pretty light calendar for European markets, with German industrial production for April expected to rise 1.3%, up from a -3.9% decline in March. That said factory orders were expected to rebound in April in data released earlier this week and fell off a cliff, so we could well see a miss here.
We also have final EU Q1 GDP which is expected to be confirmed at 0.3%.
In the UK we have the latest construction PMI, for May which is expected to slip back to 56.6, from 58.2. Yesterday services PMI saw a significant upgrade to the flash number, with an improvement to 53.4 from 51.8.
After the strong finish in the US last night, European markets look set to open higher, with Asia markets also broadly positive.
EUR/USD – rebounded from just above the 1.0640 level but needs to move above trend line resistance from the highs this year at 1.0760 to move towards 1.0850. A move below 1.0640, opens up the 1.0530 area.
GBP/USD – rallied off the 1.2430 area yesterday but needs to break above the 1.2630 area to open up the 1.2820 level. A sustained break below 1.2450 argues for a move towards 1.2320.
EUR/GBP – failure again near the 0.8600 level keeps the pressure on the downside. We have trend line support from the April lows currently at 0.8480. A move below 0.8470 retargets the 0.8420 area.
USD/JPY – moved through the recent highs at 131.35, putting us on course for a move towards the 2002 peaks at 135.00. Only a move below the 50-day MA, undermines upward momentum and argues for a move lower towards the 123.00 area.