European markets remained under pressure yesterday, posting their fifth consecutive daily decline as concerns about stretched valuations and weak commodity prices prompted further profit taking on this year’s gains.
On a number of levels major indices are starting to show signs of fatigue, with both the Nikkei 225 and the German DAX in particular looking quite vulnerable to further losses, with the DAX briefly trading below its October lows yesterday before rebounding.
So far this year both these markets have made gains in excess of 12%, beating the expectations of even the most optimistic of forecasters at the start of 2017.
With concerns about high yield credit prompting some profit taking along with a recent survey that showed investors underweight in cash, it wouldn’t take much more of a push for markets to fall even further as portfolio managers start to lock in profits as we head towards year end.
This concern about “irrational exuberance” could prompt a rush for the exits and potentially send these two particular markets at least another 10% lower, if there is no sign of a stabilisation in the next day or so.
US markets also had a disappointing day though they still remain closer to their recent highs than markets in Europe, but there is no escaping the fact that some investors are starting to develop itchy trigger fingers, given recent declines.
On the data front the UK economy is once again in the spotlight after yesterday’s fairly uninspiring wages and unemployment data. There was some concern that the number of people employed dropped by 14,000 in the quarter the biggest fall since the middle of 2015. While it is no doubt disappointing, one figure does not a trend make, and the decline is miniscule when compared to the gains seen in every month this year, and employment levels still remain near record highs.
Nevertheless the failure of wages for the three months to September to show signs of picking up is disappointing, though it is important to note that they do operate with a significant lag.
Today’s retail sales for October could well show further weakness after September’s disappointing performance of -0.8%. Expectations are for a figure of 0.1%, though even this might be optimistic with consumers preferring to keep their powder dry ahead of the potential bargains in November Black Friday numbers, or ahead of the pre-Christmas sales in December. Bank of England governor Mark Carney will also be speaking, along with a number of his colleagues later today at various public events in the north of England later today.
The euro had a rollercoaster day yesterday retesting its October peaks against the US dollar and the pound before reversing sharply in the afternoon session. This week’s predominantly positive economic data was the initial tail wind however mixed US and UK economic reports helped pull the single currency back from its peaks ahead of today’s final EU CPI data for October which could contrive to put further downward pressure on the single currency.
Expectations are for inflation to slip back to 1.4% from 1.5% in September. Core prices are expected to be unchanged at 0.9%, a number that isn’t expected to inspire confidence that the ECB will be in any hurry to consider any sort of departure from the current time line for the pulling back from current levels of stimulus.
EURUSD – having moved up close to the October peaks at 1.1880, the euro has since slipped back. The nature of the move suggests some failing momentum, which could see a move back to the 1.1700 level. While above 1.1700 the risk remains for a return towards 1.1910 and the recent peaks above 1.2000.
GBPUSD – the pound continues to just about cling on to the uptrend that has been in place since March but we need to push beyond the 1.3220 level or run the risk of a run down through 1.3100 and a return to the 1.3030 area. A move below 1.3000 argues for a move towards 1.2930.
EURGBP – failed just shy of the October peaks at the 0.9020 area yesterday before slipping back towards the 100 day MA. A move back below the 0.8940 area and 100 day MA could see a return to the 0.8870 level on a break of 0.8920.
USDJPY – starting to look a little soft with support at the 112.40 area. If we break below here then 111.20 becomes the next target. Resistance now comes in at the 113.20 area, and above that at the 114.50 level.
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