After two successive weeks of sizeable losses for equity markets there was always the possibility that we’d see a bit of a rebound this week, and so it has proved, though once again the extent of the rebound has been led by US markets, while markets in Europe have lagged behind somewhat.
US yields continued to make multi year highs yesterday, though they did slip back from these levels heading into the close, but the fact that stock markets appear to have recovered their equilibrium when rates are now higher than when markets first sold off, does make you question why the sell-off happened in the first place.
We ended the day with another positive close for US markets in which we’ve seen over 50% of the recent losses recovered in the space of 5 days, despite more evidence that inflation is set to push higher in the coming months, and this is expected to translate into a positive European open this morning.
The reason for the change in sentiment may well be down to the fact that the overall global economic picture continues to remain fairly positive, as yesterday’s European trade data for December showed, with a strong performance from French exporters, which along with a 10% rally in Airbus shares, helped the CAC40 outperform its peers yesterday.
It was also a positive day for European markets though we did close off the highs of the day as the sinking US dollar helped push the euro back up through the 1.2500 area once more, and a new 3 year high, while it can only be a matter of time before the surging Japanese yen starts to limit the gains on the Nikkei 225 as it looks to rebound off its recent lows. With the reappointment of Haruhiko Kuroda as governor of the Bank of Japan attention is likely to turn to when the Japanese central bank will start to get uncomfortable with the recent sharp rise in the currency.
The pound also had a good day as sentiment once again shifted on to a more positive note on reports that the EU were having second thoughts about having a sanctions clause in any transition deal if the UK was considered to be in breach of single market rules.
The prospect of a possible May rate rise was also helping support the pound as stickier than expected inflation as well as a more hawkish stance from Bank of England policymakers suggests that officials appear to be developing a much more limited tolerance for higher prices.
Today’s UK retail sales could suffer from these higher prices in the same way this week’s US retail sales were slightly more disappointing as higher energy and food prices dampened consumption.
In contrast to the US the UK had a pretty rotten month in December, with a slump of 1.5%, though that was largely as a result of bumper November number of 1.1% which had been boosted by Black Friday sales spending.
Recent retail sales numbers from the British Retail Consortium and KPMG earlier this month appeared to show that while some retailers were struggling we did see a pickup in January, as consumers started to re-open their wallets after a slow December. The recent cold weather in January may well have also prompted an increase in demand for coats and gloves, with an expectation that we could see a rise of 0.6%.
EURUSD – looks to be moving in on the 1.2600 area, the 61.8% retracement level of the 1.4000/1.0340 down move, having pushed through the 1.2535 area and previous highs. Support remains back at the 1.2330 level, and below that at the 1.2160 area.
GBPUSD – having moved through the 1.3970 area we look set for a further move towards the 1.4200 area and previous peaks at 1.4300. Support now comes in at the 1.4030 area, and below that at 1.3970.
EURGBP – another failure above the 0.8900 level has seen the euro slide back, with support at this week’s low at 0.8840. While below the highs for this year the bias remains for a return to the lower end of the recent range at 0.8740.
USDJPY – the break of the 2017 lows at 107.30 this week opens up the prospect of a move towards the 105.00 area initially, and then 100.00. We need to recover back above the 107.30 level to open a squeeze back to 108.00.
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