European markets started the week on the back foot yesterday as sporadic unrest across China sparks a selloff in global equities. The weakness spread across to the US, where we saw similar weakness on reports that Apple’s iPhone sales could be impacted to the tune of 6m handsets from the current disruption.
With the rest of the world enjoying life, watching the Football World Cup and learning to live with Covid without masks, Chinese authorities are continuing to double down on a strategy that has zero chance of success, and a population increasingly weary after two years of on-off restrictions, and with no endgame in sight.
The US dollar underwent a choppy session yesterday, initially slipping back before closing sharply higher on a combination of haven demand as stocks sold off, as well as hawkish comments from the likes of St. Louis Fed President James Bullard once again making the case for at least a 5% terminal rate before a pause by the end of Q1.
New York Fed President John Williams also said that more work needed to be done on inflation, however with at least another 50bps rate hike coming in December, that’s not a particularly controversial position to take.
Nonetheless, combined with concerns about China’s covid policies, US markets slipped back with some of yesterday’s losses perhaps being driven by investors booking gains as we head towards month end.
Hawkish rhetoric wasn’t just confined to Fed speakers yesterday. We also had the likes of ECB President Christine Lagarde remarking that the European Central Bank needed to take a hawkish line on rising inflation, with the mood music suggesting that we can expect to see more than one or two more rate hikes in the coming months.
This was a line also taken by the Netherlands and ECB governing council member, Klaas Knot as well as Spain’s Pablo Hernandez de Cos.
There is certainly a recognition that the ECB has been very much behind the curve when it came to recognising that inflation wasn’t going to be transitory, however there does appear to be a growing sense that they could be about to compound that mistake, by hiking aggressively just as inflation looks like it might be peaking.
That certainly appears to be the case in the US, where energy prices have been falling sharply and CPI peaked in June, and where prices paid inflation is below the levels it was at in June 2020.
Last week’s sharp drop in the month-on-month German PPI numbers for October appeared to indicate that something similar might be about to start playing out in Europe.
Today’s Spain and Germany flash CPI numbers for November could add another piece to that puzzle with Spain CPI expected to fall back from 7.3% to 7.1%, while Germany CPI is expected to fall back from 11.6% to 11.3%.
In the UK the prospect of peak inflation seems quite a long way off, with consumer spending already showing signs of slowing sharply.
The slowdown is already being reflected in anecdotal evidence of a lower asking prices in the housing market, although mortgage approvals have managed to hold up reasonably well so far. This could change in today’s mortgage approval numbers which are predicted to fall to 60k and their lowest levels since June 2020.
Net consumer credit has also slowed sharply, slipping to £0.7bn in September from £1.2bn in August. This is expected to see a modest uptick to £0.9bn.
EUR/USD – pushed as high as 1.0497 yesterday before running out of puff and slipping back sharply. We need to see a close above the 1.0400 area and 200-day SMA area, to signal further gains. If we slip back below 1.0320, we could see a move back towards 1.0180.
GBP/USD – the failure to push up through the 200-day SMA at 1.2190, where we have resistance has seen the pound slip back. We need to take out 1.2200 to target the 1.2500 area. Support now back at the 1.1870 area.
EUR/GBP – found support at the 0.8570 and has rebounded. We could see a squeeze back to the 0.8730 area and 50-day SMA. Continues to look heavy while below the 0.8780 area.
USD/JPY – found support at the 137.50 area yesterday. A break below here targets a move towards 135.00. Resistance remains back at the highs of last week at 142.50.
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