The selloff in European bond markets continued yesterday, weighing on European stock markets in the process, with the German bund in particular coming under heavy pressure. This shouldn’t be altogether surprising given the extent of the gains seen since the beginning of last year, but the suddenness of the fall in German Bund prices has raised concerns that we could see further falls, which in turn could place further downward pressure on stock prices in the coming days, as bond markets start to price in a turnaround in long term deflationary expectations. Concerns about the health of the Chinese economy could well continue today with the release of the latest industrial production and retail sales numbers for April. The last two months have seen disappointing import and export data prompt yet another rate cut at the weekend, and the speed of the move by Chinese authorities does raise the question about how bad this morning’s numbers might be. April industrial production is expected to show an improvement to 6%, from 5.6%, while retail sales are also expected to rebound from 10.2% to 10.4%, though given the continued weakness in the most recent trade data, these expectations might be somewhat optimistic. There is a concern that last weekend’s actions by Chinese authorities were a pre-emptive strike against further deterioration in the latest China data. We will soon see if that turns out to be the case in a few minutes time, and more importantly how quickly we can expect further easing measures in the weeks ahead. The recent rebound in the euro and the oil price has seen bond markets start to price out the prospects of the euro area slipping further into a deflation trap. We should get some indications of the stimulatory effect of this recent weakness with the release of the latest Q1 GDP numbers for France, Germany, Italy and the EU. France, in particular is set to see a significant rebound in economic activity, from 0.1% to 0.4% for Q1, however it is difficult to see how this will be sustained given that its manufacturing sector PMI’s have stayed stuck in contraction for the last eleven months. Germany on the other hand is expected to see a little bit of a slowdown from 0.7% to 0.5% in Q1, while Italy is expected to show its first growth in over a year, coming in at 0.2%, up from 0%. If all these numbers come in as expected the broader EU GDP number is expected to come in at 0.4%. Inflationary pressures are expected to remain benign and in some cases negative, but are no longer expected to deteriorate further, with Spanish CPI for April expected to stay at -0.6%, Germany CPI at 0.3% and French CPI expected to tick up slightly to 0.1%. In the UK the pound has continued to rise on the back of last week’s surprise election result, as well as improving economic data and looks to have a bit of a tail wind behind it. The latest ILO unemployment rate for March could boost sentiment further, if as expected, it shows a further fall, to 5.5% from 5.6%. Average earnings excluding bonuses for March are expected to jump to 2.1% from 1.8%. Now that the election is out of the way today’s Bank of England inflation report could well see Governor Mark Carney upgrade the central banks growth and inflation forecasts for the UK economy, over the next 12 months, as well as giving him much more free reign to be candid about the health of the UK economy, without any political constraints. Despite the banks so called independence, a lead up to an election is always a tricky time for central bankers lest they be accused of political interference by politicians, who might not want voters to hear a particular message. Watch out in particular for warnings about the recent strength of the pound as it nears its highest levels in nearly a month against a basket of currencies. The recovery in sterling has also been helped by the recent weakness in the US dollar, where we’ve seen expectations of a US rate rise pushed back into the end of this year on the back of softer US data. There has been particular weakness on the consumer side of the US economy over the last six months, despite the falls in oil prices easing the strains on household budgets. Now the oil and gasoline prices are rising again this stimulus effect is starting to diminish and while we could see a positive number for US retail sales in April, it’s unlikely to be sufficient to suggest a significant Q2 rebound in consumer spending. Retail sales for April are expected to rise 0.2%, down from the 0.9% seen in March. A weak number here could well weaken the US dollar further, and raise further questions about the US economic recovery. EURUSD – the euro seems to be stuck in a range for the time being but as long as we stay above the 1.1050 break out point the risks favour a move higher, above 1.1400 towards 1.1500. A push below the 1.1050 level could see a sharp fall towards 1.0900. GBPUSD – having pushed above 1.5570, 38.2% retracement of the down move from 1.7190 to 1.4565 and the 200 day MA at 1.5630, suggests we could see a move towards 1.5880. Any pullbacks should now find support at 1.5570 as well as 1.5450. EURGBP – continues to look weak, heading towards 0.7155 trend line support from the March lows. As long as we can hold above here the risk is for a rebound back towards 0.7220, and behind that at the 0.7380 level. USDJPY – the ongoing failure to overcome the 120.70 level has continued to weigh on the US dollar. In the short term it looks range bound with strong support just above the March lows at 118.30, while at the same time the rebounds keep getting shallower. We need to see a break above 120.70 to mitigate the downside risk of a move towards 116.50. CMC Markets is an execution only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.
Disclaimer: CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.