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Higher open expected after yesterday’s sharp falls

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When markets start to struggle to move higher on good news, as we saw last week, it usually doesn’t take too long before they roll over and head lower, which appears to be what happened yesterday, though the sell-off was predominantly tech driven in nature.

A number of catalysts have been put forward for yesterday’s declines, some more credible than others, with the usual “sell in May and go away” being let out for some air. The most likely reason for yesterday’s declines was probably nothing more than a bout of profit-taking after the lows of last week gave way, in what looks like a classic technical sell-off.

The fact remains the economic data is only likely to improve, something we knew last week, and any by-product of that is likely to mean the prospect of either tighter monetary policy rates in one shape or another at some point, with the only question being one of timing.  

The various supply chain issues, as well as the move towards renewables is lighting a fire under certain parts of the commodity market, which has pushed the Bloomberg Commodity Index to its highest level since 2011, and which is raising concerns about higher prices and an overheating US economy.

On Monday, the April ISM manufacturing prices paid index hit its highest level since 2008 at 89.6, while yesterday US treasury secretary Janet Yellen appeared to put her old Fed chair hat on when saying that rates might have to rise to prevent overheating, which didn’t really help the overall mood, and gave markets an additional nudge lower.  

While this may come across as merely stating the obvious, given the trillions of US dollars being thrown at the US economy, it is perhaps surprising that she felt the need to articulate it at all, less than a week after her successor Jay Powell had categorically stated that the US central bank was a long way short of the type of outcome-based data needed to alter their current policy stance. As a reminder, Powell went on to say that there were still over 8 million more American who were out of a job than there were in February last year, and as such the Fed would need to see “substantial further progress” on its full employment goals, for any change in policy to be considered. The fact is, despite Yellen’s comments which she later walked back, the bond market barely reacted, with 10-year yields finishing slightly lower on the day, though the US dollar did move higher, hitting a one-week high in the process.

While European markets finished the day sharply lower, the DAX was by far the biggest loser, recording its worst one-day loss this year. US markets also followed suit, with the Nasdaq losing 1.88%, though the Dow finished the day higher, as oil prices hit a seven-week high on the prospect of stronger demand as the US driving season gets under way, helping to keep a floor under prices.

With US markets closing off their lows, today’s European market opens is likely to be a positive one, as we look ahead to another busy day of economic data. One of the main bright spots amid the gloom of the economic rebound in Europe has been the manufacturing sector and its resilience in the face of restrictions which have, for the most part been in place in some form or other since October last year.

With some prospect of a modest easing in the summer months, political leaders across Europe’s big four economies will have been grateful for this, and with the services sector now starting to show signs of life amid the economic bleeding, there are signs that businesses are learning to adapt to some of the restrictions. In France, this resilience was sustained after March manufacturing was confirmed with a slight slowdown to 58.9, while today’s services number is expected to be confirmed at 50.4.

German manufacturing also remained solid, slipping slightly to 66.2, while this morning’s services number is expected to slip back to 50.1. It also should be pointed out that while the manufacturing PMIs have remained resilient, they aren’t always reliable, as the sharp decline in French industrial production for February showed in numbers released last month.

Nonetheless, they still can be decent guides with respect to business optimism and confidence. The pressure points in Europe remain Italy and Spain and while manufacturing has improved as shown by the data earlier this week, services are a key revenue earner and thus far we’ve seen little evidence of a return to growth. In March, Italy services PMI came in at 48.6, while Spain improved modestly from 43.1 to 48.1. These numbers are expected to improve a little in April, but not by enough exhibit any sort of economic expansion. Expectations are for an improvement to 50.0 for both, with the hope that the summer months will start to see further improvement, and more importantly a return to expansion as the weather warms up, vaccines get rolled out, and infection rates come down.

The positive data theme looks set to be continued further this afternoon with the latest US ADP employment report, which is expected to see a significant improvement on March’s 517,000 number. Expectations for April are for another 850,000 jobs to be added; which on the face of it seems a little low when compared to last month's non-farm payrolls number of 916,000, and the expectation this week that could see 1m jobs added on Friday. The ADP report appears to be lagging behind when it comes to adding back headcount, which means that at some point we could see a bit of a catch-up.

It is also important that with the various ISM reports that came out in March and April, the employment components have also started to improve. This is also likely to start to get reflected in much stronger payroll numbers as we head into the summer months, with today’s ISM services report also expected to show a stronger April at 64.1.

EUR/USD – currently holding above the 1.2000 area with support back down near 1.1920. Last week’s failure at the 1.2150 area opens up the risk of a move back towards the 1.1800 area. We now have resistance back at the 1.2080 area.

GBP/USD – seems to be range trading with resistance at the 1.4020 area which remains a key barrier to a move back to the February peaks. Finding some support at the 1.3800 level with broader support down towards the 1.3700 area.  

EUR/GBP – the 0.8730 area remains a key resistance level, a break of which opens up the 0.8820 level. The break below 0.8670 now opens up the risk of a move back towards the 0.8630 area.

USD/JPY – the uptrend line support from the January lows continues to keep a floor under the US dollar, with resistance at 109.70 as well as 110.20. Trend line support remains at the 107.95 level, with interim support at the 108.30 level. Below 107.60 opens up the prospect of a move back to the 106.80 area.

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