European markets picked up where they left off at the end of last week yesterday with another strong day of gains, helped by a rebound in oil prices as well as some soothing noises from Chinese policymakers, about the direction of the yuan, and a muted reaction in Chinese stock markets as they returned from their New Year break to post only a modest decline.
The Chinese currency continued its recent rebound reaching its highest level this year, while investors managed to shrug off yet more pretty abysmal January trade numbers, Imports dived nearly 19% while exports also declined 11.2%, despite the supposedly positive effects of a weaker currency. Even accounting for drop in commodity prices these falls do not paint a particularly positive picture, of internal or external demand, and this in itself could well prompt further policy responses in the coming weeks from Chinese authorities.
The rebound in European benchmarks was also helped by further dovish pledges from ECB President Mario Draghi to do more next month to help underpin the economy in Europe, which helped weaken the euro. The ECB President also acknowledged concerns about the stability of Europe’s banks in light of concerns about the transmission mechanism of negative rates.
Despite the rebound seen in financials and oil and gas stocks in the last couple of days the factors that have driven the sharp declines in the last few weeks haven’t changed, and for all of Mr Draghi’s soothing comments, markets are becoming much more sceptical of the ability of central banks to do anything other than extend and pretend, or think creatively, with their current policy merely being the equivalent of monetary policy double or quits.
The German constitutional court could also come in to play today as it meets once again to mull over the legality of the OMT program and while no surprises are expected there is always the possibility that it could still call into question the ECB’s room for manoeuvre when it comes to its current policy measures. The court could place boundaries on what the ECB can and can’t buy in the context of the range of assets if it decides it infringes German constitutional sovereignty.
The recent fall in the pound has largely been as a result of declining expectations of a rise in UK interest rates and the recent climb-down of the lone hawk on the MPC Ian McCafferty pretty much brought that argument full circle earlier this month, when he dropped his call for a rate rise. In comments made yesterday he explained his about turn by arguing that inflationary pressures in the UK had receded and in fact reinforced his conversion to the dark side by stating that rates could be lowered if necessary, in a significant departure from how he has previously been perceived by the markets.
Today’s UK inflation numbers are expected to come in counter to that argument of reduced inflationary pressures by rising on an annualised basis with CPI expected to edge up to 0.3% from 0.2%, and RPI expected to rise to 1.4%, from 1.2%. Core CPI on the other hand is expected to moderate slightly to 1.3%.
Despite the recent turmoil in financial markets economic data while not great hasn’t exactly been bad either, the biggest concern being that the recent market turmoil could transmit itself into a slowdown in the wider economy as consumers become more cautious.
Investor sentiment has also taken a hit and today’s German ZEW economic expectations survey is likely to give us an insight into how the recent volatility has clobbered overall sentiment. Expectations are for a sharp decline from January's 10.2 to 0, which would be the lowest reading since October 2014.
With manufacturing activity all over the globe in contraction territory attention will be turning back to the US today as markets there return from their long weekend, and the latest Empire manufacturing survey for February. This indicator has contracted for the last six months in succession with a reading this afternoon of -10.5 expected to make it 7.
It is this weakness in the US as well as rising evidence that the services sector is also hitting a sticky patch that is likely to constrain the prospect that the Fed can even consider raising rates on an economy that at best appears to be spinning its wheels, as it slowly moves forward.
EURUSD – we’ve seen a bit of a pullback in the last couple of days which might suggest a retest of the 200 day MA at 1.1050. Upward momentum should remain intact towards 1.1400, while above the 200 day MA. A move back below 1.1040 could well see a revisit of the 1.0970 level.
GBPUSD – currently trading sideways with support near the 100 day MA at 1.4410 and resistance at 1.4550. While above the 1.4220/30 area the bias remains towards the upside and a return to the recent highs and on towards 1.4800.
EURGBP – has pulled back from the 0.7860 area and could slide back to the 0.7690 area in the short term, and possibly below that towards the 0.7520 area. The 200 week MA is the key resistance on the upside at 0.7945.
USDJPY – last week’s break below the 116.00 area now opens up the prospect of a larger move lower to 106.00, completing a year-long consolidation period. For this risk to diminish we would need to see a strong recovery back through the 116.00 area.
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