Markets have put to one side concerns about Europe so far this week with UK stocks hitting their highest levels since October, after better than expected economic data out of China and Germany saw investors pile back into equities and the single currency post its single biggest one day gain against the US dollar in over a month.
Better than expected manufacturing PMI data out of China, and Europe on Monday, contributed to the sharp move higher, while German unemployment hit a record low, helping cement the gains so far this week.
Before investors get too carried away it would be prudent to remember markets exhibited similarly positive tendencies twelve months ago in the first trading days after the Christmas and New Year break, and the backdrop then wasn’t as bleak as the one facing markets now.
Even allowing for the rebound seen in Italian, French and Eurozone PMI data it remains in contraction territory and problems in other parts of Europe are never too far away with Spain’s finance minister announcing that the 2011 budget deficit could well be worse than the 8% suggested last week.
Spanish unemployment also increased in December pushing it upwards again, and the new austerity measures announced by new PM Rajoy look set to push this number even higher.
Greece’s problems are never too far away either with a government spokesman suggesting that Greece would have to leave the single currency if a second bailout could not be agreed with the troika.
Concerns about a French rating downgrade continue to resonate, though talk of it is starting to become somewhat “last year”.
Talking of “last year”, another summit has been announced, this one for the 9th January, as Merkel and Sarkozy seek to draw a line under the debt saga; however with economic data in Germany seemingly fairly resilient to the problems so far in Europe, nothing tangible of note should be expected.
Today’s economic docket includes final services PMI data for December for Italy, France, Germany and the Eurozone with only French and German data expected to stay in expansion territory at 50.2 and 52.7 respectively. Italian PMI is expected to slip to 45.3, while Eurozone PMI is expected to stay at 48.3.
In the UK concerns about the economy continue to weigh on sentiment despite a surprise rebound in Manufacturing PMI yesterday after jumping back to 49.6, well above expectations of 47.3, driven by a rebound in exports. Today’s construction PMI figure for December is expected to hold steady dropping slightly from 52.3 in November to 52.0.
Consumer credit figures for November are expected to remain weak from the flat numbers seen in October while mortgage approvals are expected to stay around the 53k mark reflecting the weak nature of the housing market.
In the US, better than expected ISM numbers for December and construction spending for November saw the Dow hit its highest levels since July.
The latest FOMC minutes indicated that the Fed would be likely to keep a loose monetary policy into 2013 and possibly beyond in an additional boost to sentiment.
EURUSD – new lows for 2011 of 1.2855 weren’t enough to signal a strong push lower last week, with the marginal new low signalling significant support around the 1.2850/70 area.
These twin lows should act as a significant barrier to further losses hence the strong rebound seen yesterday.
These lows at 1.2870 remain the main barrier to a move towards the August 2010 lows at 1.2590.
Given the sharpness of recent moves we could well continue to see choppy range trading unfold now between the recent lows at 1.2855 and the 1.3150 and even possibly 1.3220 levels.
GBPUSD – despite a brief push below trend line support from the 2010 lows at 1.4230 the cable was unable to take out the October lows at 1.5270, rebounding from 1.5360 and could well re-test the 55 day MA at 1.5740, and trend line resistance at 1.5785 from the 1.6620 highs in August. Despite this rally while below 1.5750 the downward momentum remains intact. Only beyond 1.5780 targets 1.5900.
Only below the 1.5270 lows in October targets the 1.5190 61.8% retracement of the 1.4230/1.6745 up move.
EURGBP - the December low at 0.8305 saw the single currency almost reach its January 2010 lows at 0.8285. The move did equal a 76.4% retracement of the entire up move from 0.8065 to 0.9085. A break below 0.8285 targets 0.8200.
The key resistance remains around the highs for the last three weeks at 0.8425, and only a move beyond here would target a move back towards 0.8450 and even the 200 week MA at 0.8567.
USDJPY – the break below the 55 day MA has seen the US dollar slide sharply and looks set to test the November 2011 lows at 76.50. A close and break below here opens up the all-time lows at 75.30.
Resistance now lies back at the 55 day MA at 77.45 and only a move back above here would look to see a move higher towards the trend line resistance at 78.00 from the 2007 highs at 124.15.
The 200 day MA at 78.90 is the key long term resistance.