It would appear that in the wake of last week’s gains for US stocks, we are seeing a little more caution start to kick in as we head into month end, with US markets only recovering some of their Monday losses yesterday, despite better than expected economic numbers.
A big jump in consumer confidence along with a higher revision to Q3 GDP may have given the US markets an initial boost, but the gains in both the US dollar and stocks proved a little short lived.
European markets had a more positive day, though the FTSE100 underperformed due to the sharp slide in the oil price, ahead of the conclusion of today’s OPEC meeting, where optimism is fairly low that anything will be agreed at all.
It would appear that the long awaited output deal appears to hinge around whether or not Iraq, Iran and Saudi Arabia can bridge the gap that has opened up between them, on who caps production and who cuts it, with some talk of a cut of around 1.2m barrels a day being mooted, though how that will work given Iran has said it won’t cut is anyone’s guess.
Even then there is the fact that Russia, who aren’t members of OPEC, and who currently produce over 11m barrels a day, won’t even be there and the likelihood is that we’ll probably get fudge at best, or another delay at worst.
The more positive tone from European markets came about as a result of a pledge from the European Central Bank that they would be prepared to buy more Italian bonds if the aftermath of this weekend’s Italian referendum caused turmoil in Italian bond markets and sent yields higher. While investors reacted to this positively sending banking shares higher, it seems strange that it would even needed to be articulated given that the ECB is also the arbiter of financial stability in the euro area. They are hardly going to stand by on the sidelines while all hell breaks loose around them, in a worst case scenario.
On the subject of banking stocks, UK banks are likely to come under scrutiny today as the Bank of England announces the results of its annual stress tests on the UK banking sector. In the summer Royal Bank of Scotland came out worst in the European Banking Authority tests whose capital ratios appeared the most vulnerable, and while all the banks are expected to pass them the criteria are expected to include a sharp drop in house prices, $20 a barrel oil, and a sharp jump in unemployment.
Given recent events and the concerns over this week’s Italy referendum, despite the more optimistic outlook from the OECD, maybe the next set of stress tests ought to model a scenario with respect to the problems of Europe’s banks and a possible meltdown in the Italian banking sector, and the contagion effect of such an event.
On the data front we’ll be getting the latest EU CPI data for November which is expected to show an increase from 0.5% to 0.6% on the headline number, ahead of next week’s ECB rate meeting.
While it seems unlikely that the ECB will ease policy further just over a week from now, this weekend’s events may well alter the calculus around that decision more than any data we get between now and then.
In the US we get the latest ADP employment report for November which is expected to show a rise from 147k to 161k. None of the data seen in the past few days or weeks has altered the belief that we’ll get rate hike from the Fed in two weeks’ time, and it is unlikely that any of the data that we get this week will either.
Fed Governor Jerome Powell’s comments yesterday more or less reinforced that narrative as he stated that the case for rate increase had strengthened in recent weeks. Today’s spending and income data for October are likely to reinforce the case given recent improvements in retail sales data.
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EURUSD – while still above the 1.0460 level we remain susceptible to a return to the 1.0730 area. A move below 1.0460 could well be the catalyst for a move towards parity and a retest of levels seen at the beginning of the century.
GBPUSD – currently range trading between 1.2520 and the 1.2380 area, however with the dips getting shallower we could see a break higher. With stronger support down near the 1.2330 area the prospect of further gains towards 1.2880 remains a possibility, while above these lows. Only a move through 1.2300 opens up the potential to revisit the recent lows near the 1.2100 area.
EURGBP – had another attempt at the support just above the 0.8450 area, and while it continues to look week we could see a short squeeze back to the 0.8630 area. A move below the 0.8450 area targets the 0.8380 area.
USDJPY – has found support down at the 111.30 are but could well have topped out in the short term. A move back through 113.80 would negate that view and argue for a move towards 115.60 which is the 61.8% retracement of the 125.85/98.95 down move.
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