European markets slid into the red yesterday, after initially opening higher as concerns about Italian and UK politics acted as a drag on sentiment, though weaker guidance from various technology suppliers didn’t help. 

This in turn acted as a drag on US stocks which also fell back sharply in a thin holiday trading session led by heavy falls in the tech sector after a number of chip suppliers warned on their future earnings outlook, citing weaker mobile phone demand.

This really shouldn’t have come as a shock given the break down in Apple’s numbers earlier this month, the surprise is that investors took so long to put two and two together.

The decision to stop reporting the unit sales numbers for iPhones, iPads and other individual products should have clued investors in to begin with, along with the slight miss on handset sales. The focus on an average selling price of $793 a unit helpfully disguises the fact that while margins are likely to be higher on individual products they don’t need to sell anywhere near as many products to meet revenue targets, which means fewer chips. That being said Apple’s share price still fell back sharply closing just above its 200-day MA and at its lowest levels since the end of July.

Its decision day on the Italian budget today and in the world’s worst kept secret it seems highly likely that the Italian government will send their budget back to the European Commission with little if any changes. In so doing the Italian government will be daring the commission to levy fines against it and put it in excessive deficit procedure. Bond markets appear to be underestimating the likelihood of a conflagration here, with 10-year Italian yields below their October peaks, though we have started to see some weakness in the euro which hit its lowest levels this year yesterday falling below 1.1300 for the first time since June last year, as the US dollar swept all before it.

The pound underwent a see-saw session yesterday as Brexit related news saw the pound hit a one week low against the US dollar before some afternoon strength saw it finish higher on the day against the euro. Conflicting narratives from both EU and UK officials saw the pound slide initially over concerns that a deal remained some way off before a more optimistic tone from EU chief negotiator Michel Barnier saw the currency rebound. The timing of these remarks suggests that there may be an element of politics at play here, with the EU attempting to shift any element of blame towards the UK if a deal falls through.

For now, markets appear to be overlooking the possibility that whatever type of deal Prime Minister May is able to thrash out with the EU, the final outcome is likely to be scuppered by the UK parliament, where despite the splits amongst both “Remain” and “Leave” MP’s in the chamber, both sides appear to be coalescing around a common position that the deal, as it is being negotiated, is unacceptable.

Thus, any deal with the EU is most likely to be the easy part, with pushback likely to come from all sides of the House of Commons.

On the data front the outlook is more encouraging for the UK, with last week’s preliminary Q3 GDP numbers coming in at 0.6%, the best quarterly performance since 2016, while wages growth looks like it has some traction behind it, after August wages jumped sharply to 3.1%. This is likely to be confirmed in today’s September numbers with expectations that this will be sustained at 3.1%, with the outside possibility that we could come in higher at 3.2%, which would be another multi year high.

Under normal circumstances this would prompt speculation about another rate rise from the Bank of England, however with business investment remaining subdued and a Brexit deal still some way off the central bank is likely to remain cautious. A subsequent Brexit deal would change the calculus on this quite sharply however and as such the risky side of the sterling trade remains on the short side.

The unemployment rate for the three months to September is expected to remain steady at 4%.

The US dollar had yet another decent session, closing higher for the fourth day in succession, post last weeks Fed meeting, hitting a new 17 month high as the prospect of another rise in rates next month loomed closer.

In a sign that some Fed officials are becoming a little anxious about the rise in the US dollar San Francisco Fed President Mary Daly, signalled that it was too soon to know if the Fed would need to act on rates next month.

Given that she is a voting member this year this is not an insignificant intervention, and may speak to wider unease amongst Fed officials that previously hadn’t been apparent. It will be interesting to see if permanent member Lael Brainard adds to this narrative later today, or Chairman Jay Powell tomorrow?

EURUSD – having fallen below the 1.1300 area we should now see a move towards the 1.1180 area. We need to see a recover back above 1.1320 to stabilise or run the risk of further declines towards 1.1000.

GBPUSD – rebuffed by resistance at the 1.3170 area last week and has slid back sharply, falling below 1.2920, finding some support at the 1.2820 area. A move through the 1.2820 area retargets the recent lows at 1.2680. We currently have gap resistance at the 1.2950 area.

EURGBP – having hit a six-month low last week at 0.8690 we’ve managed to rebound a little, however we’re currently capped at the 0.8780 area initially, as well as the 200-day MA at 0.8840. Bias remains towards the downside while below these key levels.

USDJPY – continues to find the air a little thin above the 114.00 area with larger resistance behind that at the October peaks at 114.60. Pullbacks are likely to find support at the 113.40 area and below that at the 112.80 area.

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