European markets had a quiet session yesterday in the absence of US markets for Presidents' Day, finishing the day modestly higher, on expectations that accommodative central banks and governments would be able to compensate for the economic impacts of the coronavirus outbreak on the global economy.
Expectations of a fiscal boost may be well founded; however, doubts remain as to the effectiveness of any such boost in the short term. China could well embark on some tax cuts and there has been some indication that they might be leaning in that direction, however these could well be limited, and while lowering lending rates might also help, there's no guarantee that anyone would want to take on extra borrowing at a time when consumer activity is on the cautious side. Furthermore, there are only so many new infrastructure projects one can take on at a time when corporate leverage is already high.
Investor concerns about the effects the coronavirus outbreak might have on future guidance expectations have thus far been dismissed by investors, as evidenced by recent record highs, not only in US markets but in European markets as well.
This mindset may well change in the coming days given last night’s unexpected revenue warning from Apple for the current quarter, which should act as a timely reminder, if any were needed to investors, that companies still need to meet their guidance forecasts. If Apple says they are likely to miss their forecasts then investors will need to pay attention to other companies with large exposure to the Chinese economy as well.
Asia markets appear to have taken these concerns on board, sliding sharply this morning, with Apple suppliers in particular taking a beating, and with HSBC also revealing that it missed expectations on its latest numbers as a result of the problems in Hong Kong, today’s European open looks set to be a weaker one.
After a strong performance last week, the pound saw a little bit of profit-taking yesterday as markets start to absorb the political landscape in the wake of the unexpected departure last week of UK chancellor Sajid Javid, only weeks ahead of what would have been his first budget. That task now falls to Rishi Sunak, and the rise in gilt yields in the last couple of days would appear to suggest that markets believe that we could see a fiscal boost in the months ahead.
With Sajid Javid, expectations around a fiscal boost had been tempered somewhat, however last week’s events have altered perceptions. Being able to borrow for 10 years at 0.6% and for 30 years at 1.5% offers a compelling case for a longer-term view on large scale investment projects, and as such the likelihood that the Bank of England could well be done when it comes to any further rate cuts.
On the data front the case for a rate cut has also been a weak one, despite a lacklustre end to the end of 2019, which prompted some speculation that the Bank of England might cut rates at the end of last month.
We have a raft of data releases on the UK economy this week starting today with wages, and unemployment, followed by inflation and retail sales data later, as well as flash PMIs for February on Friday. These are expected to point to an economy that is in fairly decent shape, though the recent wet weather could prompt a soft patch in the February data, next month.
Today’s jobs numbers are expected to show that unemployment for the three months to December remained steady at 3.8%, a 45-year low, with wages excluding bonuses expected to come in at 3.3%, slightly down from 3.4% in November. When set against such a weak end to the last quarter, it seems probable that the latest retail sales data for January could well see a big rebound when they get released on Thursday, particularly when CPI inflation is still solidly below 2%.
EUR/USD – the slide to almost three year lows could well see further declines towards 1.0730 which represents a gap that came about in April 2017 when it became clear that Emmanuel Macron would win the French Presidency. A break below 1.0780 opens up the potential for further losses towards the 2016 lows at 1.0340. We need to get above 1.0880 to stabilise and argue for a move back to 1.1000.
GBP/USD – found support at 1.2870 earlier this month but needs to break above the 50 day MA, as well as 1.3100 trend line resistance from the December highs at 1.3515 to target further gains. Below 1.2870 targets a move towards 1.2780.
EUR/GBP – currently finding support at the 0.8300 level with a break targeting further losses towards the 0.8000 level. 0.8300 is a critical support given that it the lows this year, last year, as well as 2017. We currently have resistance at the 0.8400 area.
USD/JPY – finding a bit of a barrier at the 110.20 area, which while it holds will make the US dollar susceptible to further range trading. Support currently comes in at 108.50 and the 107.65 area.
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