It was a rather mixed day for equity markets yesterday with US markets posting new records, all the while finishing the day more or less unchanged, while European markets slipped back after the latest Chinese economic numbers pointed to another slowdown in industrial production as well as retail sales in October.
Sentiment also took a knock due to apparent disagreements between the US and China over a failure to agree on specifics when it comes to agricultural purchases, and also pointed to the difficulties in trying to square the circle of an agreement. At the same time China wants any agreement to be predicated on an agreement to roll back some tariffs, something that President Trump is reluctant to agree to.
Essentially, we appear to be back where we were a few weeks ago, with the only difference being there doesn’t appear to be any desire to make things worse between the two parties for the time being. That also helps explain why equity markets this week haven’t really lost that much ground after the gains of the last few weeks.
Yesterday’s testimony from Fed chair Jay Powell was also remarkable by how upbeat he appeared to be about the US economy. In fact, a number of Fed policymakers appear to feel this way, including Fed vice chairman Richard Clarida, who stated that he didn’t see much in the way of weakness in the US consumer.
This particular belief might well have a short shelf life given that later today we will get to see the latest US retail sales numbers for October, and it should be noted that consumer confidence did take a bit of a tumble in October, although it is still at fairly elevated levels. Expectations are for a rise of 0.3%, up from -0.1% in September.
While the US economy still looks fairly resilient the outlook for Europe still looks pretty weak despite yesterday’s better than expected German Q3 GDP numbers which came in better than anticipated. The German economy managed to avoided a technical recession with a modest expansion of 0.1%, beating expectations of a 0.1% contraction.
While welcome it also means that the prospect of some form of fiscal response from the German government is much less likely, thus keeping the pressure on the ECB to find new methods of trying to support the economy in Europe, which helps explain the lack of a positive market response yesterday in the DAX.
In an attempt to try and bring the ECB governing council together new ECB President Christine Lagarde held a get together at a Frankfurt hotel this week. She is likely to have her work cut out, given some of the strong views that have been aired in the past month or so.
Today’s final inflation numbers are only expected to confirm the extent of the problem ECB policymakers have in trying to re-energise the inflation bunny. Headline CPI is expected to be confirmed at 0.7%, well below the ECB’s target rate of 2%, with core prices slightly higher at 1.1%.
EURUSD – found support just above the 1.0980 level yesterday, with the bias still on the downside while below the 1.1050 area, with resistance also at the 1.1100 area. The risk remains for a move below the 1.0980 level, with a break opening up a return to the October lows of 1.0880. Broader resistance can be found at the 1.1180 area and 200-day MA.
GBPUSD – threatening to edge back towards the highs but we need to push back above the 1.2980 area to sustain it. The resistance at the 1.3000 area is a problem in the short term. The 200-day MA at 1.2680 is a big support level and while above it the scenario remains bullish for 1.3200.
EURGBP – another marginal new low yesterday as the euro continues to sink lower. Resistance remains near the 0.8670 area. We still need to see a sustained break below the 0.8570 level to open up the potential for a move towards the 0.8410 area and the lows this year.
USDJPY – the failure to move back above the 109.20/30 area has seen the US dollar slip back towards the 50-day MA at 108.20. A move through 108.20 opens up the prospect of a move towards 107.50.
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