More records were broken yesterday as the Dow Jones Transportation index became the last US index to make a new record high, while we also saw new records from the S&P500, the Russell 2000 and the Dow as well, as US markets blasted through all of their previous peaks.
Asia markets picked up the baton overnight pushing higher as a host of Japanese and China data hit the wires.
The final iteration of Japan Q3 GDP came in at 0.3%, which wasn’t as good as expected, while the latest November China trade data needs to show some improvement on the export side given the sharp weakness in the Yuan seen throughout November.
In October we saw a decline of 7.3% reflecting a fairly weak global outlook and this morning’s November number did improve markedly showing a bit of a rebound as they came in at 0.1%, with a particular improvement in US exports. The numbers also improved to Japan and the EU, which suggests that global demand might be starting to pick up, though it’s still not anything to get too excited about.
The decline in imports seen in October of 1.8% also showed an improvement in November with a rise of 6.7%
If yesterday’s rally in European markets was predicated on a weekend bailout of the Italian banking system and an extension of stimulus by the ECB later today there is the prospect that on some measure we could see some scope for disappointment.
The decision by the board of Monte dei Paschi last night to ask for an extension until mid-January from the ECB to pull together the €5bn for a privately funded capital injection would appear to suggest that any bailout this weekend if it were to happen is unlikely to be a voluntary one, and could be one that has the politically toxic consequences of bailing in retail bondholders.
In asking for this extension it would appear that Italian officials have decided given the lack of volatility in the aftermath of last weekend’s vote, that they have the luxury of a little more time, despite the resignation of Mr Renzi. The risk is they could be misreading the reasons for why the markets appear unconcerned, given yesterday’s chatter that a bailout could be coming as soon as this weekend.
While the reports of a bailout request were denied yesterday the usual rule of thumb when these sorts of reports do the rounds is that there is usually an element of truth to them, even if we don’t know the exact mechanics, and markets appear to be responding to that, which means if it doesn’t happen sentiment could change quite quickly.
The picture would well be further complicated given yesterday’s sovereign downgrade of the Italian economy by ratings agency Moody’s to a negative outlook over concerns of further political instability, deferred reforms, and an increasing debt burden.
As with regards to today’s ECB meeting, expectations are high that we will see the bank extend its monthly asset purchase program by another six months to September 2017. This has been helped in no small part by the increased availability of eligible bonds after the sharp bond market sell-off of recent weeks.
As with all things to do with the ECB, while rates are expected to remain where they are, the latest forecasts on inflation and growth are expected to be keenly scrutinised, particularly on the inflation side, given that headline CPI is now at 31 month highs and trending higher, albeit still well below the target rate of 2%.
Any upgrades to these numbers will make the case for a QE extension much harder to argue, yet while there is no question that the outlook is improving, sentiment still remains fragile.
The weaker euro has certainly helped, with the latest forward 5 year 5 year inflation swap coming within a whisker of a one year high, above 1.7% yesterday, however there is a concern that the CPI improvement is merely a symptom of a more global effect driven by the rise in US yields and the reflation trade.
EURUSD – currently holding above the 1.0700 area, with support further down at 1.0650 the bias remains towards a move towards 1.0870. Only a move below 1.0460 could act as the catalyst for a move towards parity and a retest of levels seen at the beginning of the century.
GBPUSD – the pound continued to slide yesterday but as long as we hold above 1.2380 trend line support from the October lows the uptrend towards 1.2880 should remain intact. We also have interim support at 1.2570, this week’s low. Only a move through 1.2300 opens up the potential to revisit the recent lows near the 1.2100 area.
EURGBP – has broken higher, pushing above the 0.8490 area and opening up a potential move towards the 0.8600 area. A move back below the 0.8480 area retargets the lows last week near the 200 day MA.
USDJPY – currently chopping around below the 115.00 level, with the main resistance near 115.60 and the 61.8% retracement of the 125.85/98.95 down move. Below 112.40 argues for a retest of the 111.20 area.
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