European markets managed to eke out a fifth successive week of gains last week helped in no small part by a rebound in the US dollar which pushed the euro to its lowest levels in three months, while the FTSE100 also posted another strong finish to the week closing at a two-month high.

The recent easing in trade and geopolitical tensions has helped, however with the 1st May deadline coming up for a decision on EU sanctions as well as concern over the Iran nuclear deal, further upside for equity markets could become trickier to sustain in the event these tensions resurface.

US markets on the other hand had a rather mixed performance, finishing a rather choppy week more or less unchanged, as nervousness about tech valuations prompted some profit taking across the sector. The strength of some of the numbers coming out of the US is somewhat counterintuitively causing anxiety in the form of questions as to the sustainability of future earnings growth against a backdrop of potentially higher interest rates, as well as higher costs which could be prompting investors to conclude that this could be the high-water mark for returns this year.

This concern about rising costs is a valid one given recent rises in commodity prices, with the Reuters CRB index back at levels last seen in October 2015, with crude oil prices one of the driving forces behind that move.

The move higher in oil prices while good news in some respects also has the potential to cause significant problems in in the near term, particularly in terms of personal spending. We saw that in Friday’s US Q1 GDP numbers which on the face of it were better than expected, coming in at 2.3%, however the personal consumption component in the numbers collapsed from 4% in the last quarter of 2017 to 1.1% in Q1. Today’s April personal spending numbers may show an improvement in that regard.

While there was some positive news in the form of the employment cost index showing a gain of 2.7%, showing that wages are starting to rise, the rise in oil and other commodity prices has the potential to act as a significant brake on the global economy. Since last June Brent oil prices have risen by over 60%, while US prices have risen by more than 50%.

This should be a concern to policymakers across the world, and in particular to President Trump who currently seems intent on throwing the Iran nuclear deal up in the air. Having seen aluminium prices surge on the back of recent tariff threats and sanctions, the President may have to ask himself what a further increase in oil prices might do to consumers and businesses if he presses ahead with his threat in the coming days.

The pound had another difficult week on the back of some disappointing economic data, sliding sharply for the second week in a row, after UK GDP came in at 0.1% for Q1, well below expectations of 0.3%. This was a sharp drop from the 0.4% seen in Q4.

There was some weakness in the services data, however it was the construction sector that took the brunt of the damage, which when you think about it shouldn’t be too much of a surprise, given the collapse of the UK’s second biggest construction firm in January. Carillion’s collapse appears to have rippled through the sector and had the effect of knocking about 0.21% off overall GDP for Q1.

This recent weakness in UK data has forced a reassessment of the likelihood of a rise in UK interest rates in the short, as well as medium term, hurting the pound in the process.

As we head into the end of the month, the main focus this week will continue to be on earnings, M&A, ongoing trade tensions, as well as the latest Fed meeting and US payrolls report for April.

On the corporate front the big story over the weekend is the news that Sainsbury the UK’s second biggest UK food retailer is in talks with Wal-Mart over a tie-up with Asda, which is sure to prompt calls for the Competition and Markets Authority to scrutinise the deal over concerns about the pricing power this new tie up might create. A successful deal would see the combined company overtake Tesco as the number one UK food retailer.

While these are valid concerns the reason the deal is happening is because of the already tough retail environment and the squeeze newcomers Aldi and Lidl are already putting on margins, along with Amazon.

If a deal were to occur it seems likely that there might be some job losses given some store overlap, between the two brands along with management duplication. While this is a concern, both Aldi and Lidl are in the midst of a large store expansion program with plans to open up to 80 new stores by 2022 with the creation of thousands of new jobs.

EURUSD – last week’s push below the 1.2150 level and March lows, opens up the prospect of a move towards the 1.1800 level, with support at the 200-day MA at 1.2000. This would appear to complete a topping pattern that has been playing out over the last few months. A move back above 1.2170 negates this break lower and argues for a move back to 1.2300.

GBPUSD – on course to retest the lows this year at 1.3710, with a break potentially targeting a move towards the 200-day MA at 1.3520. We need a move back above the 1.3920 area to stabilise and target a return to the 1.4020 area. 

EURGBP – found support at the 0.8680 level last week, before rebounding back sharply through the 0.8780 area towards the 100-day MA at 0.8810. A move through here targets the 200-day MA at 0.8880.

USDJPY – moved through the 109.20 area last week and could well follow through towards the 200 day MA at 110.20. For that to unfold we need to hold above the 108.80 area. A move below 108.70 reopens up a move back towards 108.20.

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