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Europe set for lower open, after late US reversal

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Confirmation that Fed chairman Jay Powell was getting the nod for another 4-year term leading the US Federal Reserve was the catalyst that managed to pull European stocks back off their lows of the day yesterday.

Although it wasn’t enough to pull the likes of the DAX and CAC40 into the green, it was still welcome news for a market that craves continuity and a familiar way of doing things.

While Lael Brainard, who secured the vice chair position is also a more than competent candidate, her appointment would have introduced a fresh level of uncertainty into a market that is looking with increasing concern at events that are unfolding in certain parts of Europe. When Powell first took over from Janet Yellen back in 2018, it took a while for markets to familiarise themselves with the new Fed chairman, and for the new Fed Chairman to familiarise himself with the markets.

The reappointment of Powell signals a steady as she goes approach, sending US yields sharply higher, along with the US dollar, while gold prices plunged.

US stocks also reacted positively initially, however as yields continued to rise the likes of the S&P500 and Nasdaq rolled over into the close, though not before setting new record highs in the process.   

It also means that the direction of travel when it comes to upcoming Fed policy over the next few months is unlikely to see a significant shift away from what is currently expected when it comes to looking at the data, an acceleration of the taper program, as well as bringing forward expectations over the timing of a possible rate rise, a policy course that may well not have been the case with a Brainard nomination.

As a consequence of last night’s late turnaround in US stocks and weaker finish, today’s European market looks set to be a slightly weaker one.

Civil unrest, renewed covid restrictions and rubber bullets aren’t the look European leaders had envisaged when they slowly started to ease restrictions only a few months ago. The real fear now is that the tighter restrictions being implemented now will eventually morph into harsher measures the closer to Christmas we get, with all the attendant risks such measures could bring to populations jaded by multiple lockdowns.

We know only too well from events just over a year ago, how half-hearted measures now merely delay the inevitable, and though vaccination rates are higher now than they were then the real fear is that may not be enough. The biggest concern is about rising rates in Germany, where the lack of a central government has prompted a fragmented response at the state level.

The risk of a slide back into economic contraction is rising with each passing day, and that in itself is feeding into a weaker euro, and while today’s flash PMIs from Germany and France are likely to point to still fairly decent levels of economic activity, they have been heading in the wrong direction for several months now.

In manufacturing both France and German economic activity is expected to slow to 53.1, and 56.9 respectively, while in services we can also expect to see a similar softening to 55.5 for France and 51.5 in Germany.

The UK, on the other hand by opening up earlier, and seeing infections stay constant at a higher level through the summer, may well have played a blinder in building up a more resilient wall of immunity, along with the booster program, as the weather gets colder. That’s not to say that the strategy might not still go pear-shaped, but in terms of economic activity we haven’t seen the type of drop off being seeing in Europe.

Today’s November flash PMI numbers are expected to see manufacturing slow modestly to 57.3, from 57.8, while services, which saw a decent jump in October to 59.1, from 55.4, is set to fall back to 58.5.   

If the US was hoping that by announcing the prospect of a release of oil reserves from the SPR would hasten even further the declines seen in the oil price these past four weeks, he reckoned without OPEC. Having spent the last few weeks haranguing the cartel for not upping production fast enough, they got their own back yesterday by saying that any SPR release could force them to reconsider their current strategy of increasing output by 400k barrels a day at the beginning of each month. This intervention helped pull oil prices off their lowest levels in 7 weeks, and finish the day higher.

EURUSD – continues to sink in the face of a resurgent US dollar, and looks on course for a test of the June 2020 lows and the 1.1160/70 area. For the downside pressure to diminish we would need to see a push back above the 1.1400 area.    

GBPUSD – looks set for a retest of the lows last week at 1.3350. A break below 1.3350 has the potential to target further declines towards 1.3160. We need to gain a foothold above the 1.3500 area and kick on through the 1.3520 area to open up the 1.3600 area.

EURGBP – continues to hold above the 0.8380 area, with the bias remaining for a move towards the 0.8280 area. Only a move through the 0.8470 area opens a move back towards the 200-day MA and the 0.8580 area.

USDJPY – has retested the 115.00 area, with a break above 115.20 targeting a potential move towards the 116.00 level. Pullbacks currently have support at the lows last week at 113.60.


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