European markets underwent a slightly more cautious session yesterday ahead of the upcoming G7 meeting later this week, with the Italian market weighing on the rest of Europe, after new Italian Prime Minister Guiseppe Conte pledged to push through the range of populist measures outlined in Five Star and the League’s policy manifesto, including the rolling out of a “citizens income”, a two-tiered flat tax, and a crackdown on immigration.
Italian bond yields pushed higher again, with the 2 and 10-year yield both rising 25 bps on the day, while the FTSEMib rolled over as investors get a cold dose of reality, that the new government had no intention of signalling a softening or a dilution around the edges of their fiscal program.
There also appears to be some nervousness over this week’s upcoming G7 meeting and the prospect of some form of agreement on tariffs with some concern that we may not get any progress this weekend. This raises the prospect of an extended period of uncertainty and whether investors are right in their belief that this is part of a strategy by President Trump to keep everyone off balance, until stepping back at the last minute.
The current resilience of the US economy may embolden the US administration to calculate that they have slightly more leverage in this particular trade standoff, which means they may well dig in their heels for a lot longer than investors suspect. There does appear to be progress with China with reports that the Chinese have agreed to purchase $70bn worth of US agricultural and energy products on the proviso that no extra tariffs will be levied.
Whatever happens next politicians need to tread carefully particularly since an escalation on either the EU or US side could bring the German car industry into the cross hairs if Trump doubles down and targets Germany’s biggest export market as part of his section 232 investigation into car imports into the US.
US markets on the other hand continue to sail on fairly untroubled, with another record for the Nasdaq after another day of decent economic data, this time the non-manufacturing ISM for May which showed another improvement, coming in at 58.6, up from 56.8 in April, with the prices paid component also showing decent levels of price growth in a similar manner to the manufacturing index.
This resilience in input costs appears to be a recurring theme and will only serve to reinforce expectations about the tone of this months Fed meeting, and how policymakers intend to manage guidance for further rate rises this year when they meet to raise interest rates again, as most people expect they will next week.
The pound had a decent day after a better than expected services PMI number for May showed a significant improvement in economic activity reinforcing the belief that the slowdown seen in March was no more than a cold weather-related blip. A sharp rise in fuel prices in the past few weeks has also raised concerns that the Bank of England is underestimating inflation after the recent fall in the pound exacerbated the recent rise in the oil price to four year highs. Some of the strength in sterling is being constrained by tensions over the upcoming vote on various Brexit bill amendments which are due to be debated next week in Parliament.
EURUSD – continues to struggle below the 1.1750 area and while it does so the risk remains for a move back to the 1.1620 area in the short term with broader support at the May low at the 1.1500 area. We need to move through 1.1750 to target a move to the 1.1830 level. A move below the 1.1500 trend line support level opens up a move to the 1.1300 area.
GBPUSD – continues to edge higher towards the 1.3460 area, but we need to stay above the 1.3270 area to do so. Support also remains back at the May lows at 1.3200, with a break targeting broader support just below that at 1.3110 trend line support from the January 2017 lows.
EURGBP – continues to range trade with resistance just above the 0.8800 area and support just above the 0.8700 area. The prevailing range remains intact with a break below 0.8690 targeting the 0.8640 area. The 200-day MA at 0.8850 should cap the upside.
USDJPY – still looks well supported while above the 50-day MA at 108.35, the prospect of a move back to the 110.30 level and 200 day MA seems a realistic prospect.
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