Equity markets appear to be the enacting the maxim of 'see no evil, hear no evil and speak no evil', as they continue the rebound that has been in place since the beginning of the year, on optimism that we will get some form of fudge when it comes to a US-China trade deal, ahead of the 2 March deadline.
This optimism appeared to be confirmed by President Trump yesterday when he said that he would consider postponing the deadline if he needed to, which coming on top of reports that a deal to avert another US government shutdown was in the works, helped send the S&P 500 through its 200-day MA for the first time since 4 December last year.
The positive momentum generated on the back of these developments has seen Asia markets perform strongly overnight and looks set to carry over into Europe this morning with another positive open.
The pound has remained under pressure after Prime Minister May followed through on expectations that she would defer another Brexit vote on her withdrawal agreement until the end of the month. It is now becoming increasingly apparent that markets still think that a deal remains the most likely outcome, however there also remains the real possibility that both sides appear are miscalculating the other's ability to pull back from the brink, meaning a no deal by accident remains a much higher prospect than most people acknowledge.
On the data front it is apparent that there is some caution starting to set in when it comes to consumer confidence, and consumer spending, despite declining inflationary pressures. This decline in inflationary pressure is expected to continue in the latest CPI numbers for January from December’s 2.1%. A fall in air fares and a decline in fuel costs saw headline CPI come in at its lowest levels in 22 months in December at 2.1%, giving an additional boost to consumers at a time when wages are rising by over 1% more.
The January numbers are expected to come in a little bit weaker at 1.9%, which is rather surprising given that rail fares and other transport costs tend to move higher at the beginning of the year, a seasonal effect which tends to push prices higher. This means we might see a small tick higher, however it shouldn’t be too aggressive given that retailers are finding it difficult to pass on price increases, and heavy discounting could offset the rise in domestic transport costs.
Core prices have also been in decline, currently below 1.9%, which if maintained could call into question the timing of any Bank of England rate increase, if Brexit uncertainty proves short-lived.
While we’ve got used to political uncertainty here in the UK, the disease of uncertainty appears to be spreading across Europe, with Spain the next European country to be at risk of a collapse in its government, if the latest Spanish budget doesn’t get passed today.
Incumbent Pedro Sanchez was already the leader of a minority government, having replaced Mariano Rajoy in the middle of last summer. He is currently trying to get his latest budget through parliament, however he can only do so with the help of pro-Catalan parties, which has prompted furious protests from other parts of the Spanish body politic in terms of his dealings with them.
With the trial due to start this week of the Catalan separatists who organised the 2017 referendum, tensions are already high, putting the prime minister's budget plans in the firing line. If he fails to pass the budget today, we could get new elections as soon as April.
EUR/USD – appears to have found a level of support at 1.1250, posting a key day reversal, which suggests the potential for a rebound towards the 1.1400 level, and even a return to the highs around the 1.1500 level. A move below 1.1250 negates and opens up the 1.1215 level.
GBP/USD – the pound has managed to hold above the 1.2820 level for now. While it does the risk remains for a move back towards the 1.3020 area. A move below the 1.2820 level could well open up a move towards 1.2700. Any rebounds need to move back above the 1.3020 level to stabilise.
EUR/GBP – edging back towards the highs last week at 0.8820. A move through here opens up the 200-day MA at 0.8860. While below 0.8820 the risk remains for a return to the 0.8720 area.
USD/JPY – has managed to move above the 110.20 level, thus opening up the risk of a move towards the 111.00 area. Support comes in at the 109.80 area.
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