European markets had a decent start to the week yesterday with the DAX making a record close, and set to open at a new record today too, while the CAC 40 also had a good day after President Macron won a healthy majority in the French parliament, fuelling optimism that his new mandate would herald a new beginning for the French economy.
Despite yesterday's gains, the best in six weeks, the CAC 40 still remains well below the peaks seen in the aftermath of Macron’s presidential win at the beginning of May.
At any rate optimism is high that he should be able to push through widespread reforms to improve the French labour market without too much problem, and that is undoubtedly true with 350 seats in the French assembly. However Nicolas Sarkozy also had a healthy majority in 2007 with 318 seats and still came a cropper, with a range of reforms that saw the unions bring the country to a standstill. Let’s hope Mr Macron has more luck with his reform programme, though history tells us that it could well be a bumpy ride.
Even though we saw both the Dow and S&P 500 make new record highs yesterday, the Nasdaq, which has for so long this year set the pace, was unable to keep up, despite the fact that much of the rally was driven by the tech sector. US banks also had a good day after some fairly hawkish words from New York Fed president William Dudley. His comments that the outlook for the US economy was pretty good and that he wasn't paying too much attention to what bond markets were signalling gave a significant boost to the US dollar, sending it to two-week highs.
Mr Dudley’s comments also suggest that Fed officials could be extraordinarily complacent with respect to what bond markets are signalling, and have been signalling for several weeks now, with the yield curve flattening out, as US growth expectations slip back from where they were at the beginning of the year.
As if to reinforce these concerns, energy prices had another dreadful day, with oil prices hitting a new seven-month low, as increasing shale production, along with rising output from Libya and Nigeria, continue to undermine OPEC attempts to cap output. US rig counts rose for the 22nd week in succession, to their highest level since April 2015, while the latest data out of Asia suggested that demand was slowing in China, Japan and India.
We have more central bankers to keep an ear on today with Bank of England governor Mark Carney due to speak later this morning, giving his delayed Mansion Speech in the wake of last week’s surprisingly wide spilt on the monetary policy committee (MPC). Three policymakers voted to raise rates, though one of them, Kirstin Forbes, will have left the MPC by the time of the next meeting, replaced by Silvana Tenreyro, who will in all likelihood adopt a low profile to begin with.
The pound had a mixed day yesterday as the first day of Brexit talks got under way without too much in the way of drama, between Michel Barnier and UK Brexit Secretary David Davis.
In the US, Federal Reserve vice chair Stanley Fischer is also due to speak in Amsterdam later today, and it will be instructive to see whether he is as relaxed about US bond yields as his colleague William Dudley appears to be.
EUR/USD – drifted lower towards the 1.1120 area yesterday with the highs just below 1.1300 area as resistance. A move below the 1.1100 area could well signal a double top reversal which could signal a potential move towards 1.1020 in the short term, and then 1.0900. Resistance remains back up at the 1.1300 area.
GBP/USD – continues to struggle to push beyond the 1.2820 area and the 50 day MA, which means we could slip back towards the 200 day MA. It currently remains corralled between this resistance area and support just above the 100 and 200 day MA’s as well as the 1.2635 area. A move through 1.2830 argues for a retest of the 1.2920 area.
EUR/GBP – finding it difficult to rally for now with support at the 0.8720 level a key area, for further gains. This needs to hold for the current up move to continue, towards the 0.8820 area, and then 0.8920. A move below here could well see a retest of the 200 day MA at 0.8615.
USD/JPY – the 111.60 area remains the key obstacle for further gains towards the 112.40 area, and 113.00. We need to hold above the 200 day MA at 110.60 for this move to unfold, or risk a return to the 109.40 area.
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