If the results of this weekend’s ECB stress tests were intended to draw a line under the problems of the European banking sector, then the jury still remains out.
Concerns about a recession in Europe remain and in the absence of a clear plan to help boost lending meaningfully, further economic weakness remains likely along with declining prices, as the siren calls grow louder for full blown QE from the ECB.
Yesterday saw another central bank join the race to the bottom in the interest rate cycle, as the Swedish Riksbank cut its headline rate to zero in an attempt to deal with the same falling prices. Unfortunately it is likely to be a zero sum game given that everyone else is doing the same thing.
In the UK we’ve also seen evidence of a slowdown in prices, and in lending as well, and this morning’s latest credit numbers are likely to reinforce that.
Mortgage approvals in September are expected to have slipped back to 62k from 64.2k, while consumer credit and net lending is also expected to have weakened from the numbers in August, reinforcing last night’s message from Deputy Governor of the Bank of England Sir Jon Cunliffe that interest rates were likely to stay lower for longer due to weak prices.
Ever since FOMC member James Bullard suggested that the Federal Reserve should consider delaying the end of its bond buying program two weeks ago, global stock markets have gone on a bit of a tear, regaining most of their October losses.
His rationale was that the strength of the US dollar could well cause the Fed to miss its inflation target, however the timing of the intervention spoke to a larger truth, and that was the stock market plunge protection team were still looking at keeping asset prices high.
The continued fall in oil prices speaks to continued fears about global demand with both Europe and China particular causes for concern against a backdrop of plentiful supply.
This feeds into a deeper concern that for all the optimism about the US recovery, on its own it won’t be immune to a slowdown elsewhere, given that over 50% of S&P500 company earnings are derived from overseas.
Some of the week’s disappointing US data has also raised doubts about the strength of the current rebound in economic activity, though we did see October consumer confidence hit its highest level in seven years, flying in the face of recent weakness in durable goods and retail sales data. It seems US consumers are saying one thing and then doing the opposite.
Surely if confidence is high then that should translate into increased spending and consumption and for all of this year these two indicators have diverged quite strongly shredding the credibility of the confidence indicators in the process.
It would appear therefore that markets are in essence banking on the prospect that the Federal Reserve will do everything in its power to anchor interest rate expectations at, or below, current levels, hence last night’s strong finish for US markets.
While Mr Bullard’s words have helped put a floor under asset prices it remains unlikely that the Fed will deviate from its timetable of pulling back from its bond buying program.
We can therefore expect the Fed to call time on the remaining $15bn of monthly bond buys, but in an attempt to push out interest rate expectations it will probably leave the language of the statement unchanged, leaving intact the key phrase to keep interest rates low for “a considerable amount of time”.
Any attempt to alter the language in anything other than a dovish fashion could well see markets take fright.Investors could well also look for clues as to whether the Federal Reserve might consider QE4 in the event global economic conditions fail to improve, with both Europe and China the major causes for concern.
This doesn’t seem very likely in the short or long term, particularly given the proximity of the mid-term elections, where the Fed will be keen to be seen as politically neutral as possible. In any case it wouldn’t do much for the Fed’s credibility, which is becoming stretched as it is.
EURUSD – the euro has managed to push beyond the 1.2720 level and looks set for a move towards 1.2800. A move beyond 1.2800 argues for a move towards 1.2900 and the highs this month. Support continues to come in just above the 1.2600 level. We also have support at 1.2570.
GBPUSD – yesterday’s break above the 1.6150 level could well be the catalyst for a move back through 1.6200 and onto the 1.6300 level, breaking as it has above an inverse neckline on a head and shoulders. On the downside the pound should remain fairly well supported at last week’s low just below 1.6000. The lows earlier this month remain the major support at 1.5875.
EURGBP – we continue to find support between 0.7855/65 but while we stay below the 0.7940 area then the risk remains for a move back towards the September lows at 0.7760.
USDJPY – while below the 108.50 level the risk remains for a test back lower. The break last week above 107.50/60 should now act as some support, a break of which would suggest a test back towards 106.20. Above 108.50 argues for a retest of 110.
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