European markets finished yesterday in a somewhat mixed fashion, with the FTSE 100 closing higher for the sixth day in succession, while the DAX underperformed despite posting a two-month high. We have seen some decent gains in European markets over the last four weeks, but with US bond yields suddenly spiking higher in the last few days, investors appear to be taking the opportunity to take profits on some of these gains.

Markets in the US also opened the day in a positive vein, buoyed by a series of earnings announcements that beat expectations. As the day went on and after Europe had closed, sentiment started to turn sour and US investors appeared to get a touch of the vapours with respect to the tech sector, with Google owner Alphabet leading the declines, as US markets finished the day sharply lower.

The declines appear to have been prompted by some concern about the growth in capital spending with $7.3bn in Q1 alone, well in excess of the same period a year ago, however it is an age old adage that if you don’t invest in your infrastructure in the short term you pay the penalty eventually in the long term. Sensible investors will generally tolerate higher capex if it helps keep the business sustainable in the face of higher traffic while increasing resilience. The problem comes with a valuation that could be conceivably fully valued already, which seems to be the case here.

Apple shares also continued their recent losing streak ahead of next week’s Q2 trading update, as the penny begins to drop that the premier pricing policy on the iPhone X may well be starting to affect handset sales. At the company’s Q1 update handset sales were already starting to decline, but the effect was masked to a certain extent by the higher prices. The Q2 numbers may well act as a wake-up call given recent warnings by Apple suppliers and may be more difficult to disguise.

As a result of last night’s sharp sell-off in the US markets, Europe looks set to open lower this morning with attention firmly focused on the prospect that despite improved profits, potentially higher interest rates and higher costs could be prompting investors to conclude that this could be the high water mark for returns this year.

In the context of costs, crude oil prices hit another multi-year high yesterday above $75 a barrel before retreating as concerns over the Iran nuclear deal and possible US sanctions continued to underpin the price. The $80 a barrel level still looks a real possibility and while central banks may welcome this new inflationary tailwind, it is also the wrong kind of inflation in that it hits consumers directly and as such could prompt a change in consumer spending away from the more discretionary items. Today’s inventory data could go some way to determining whether we see further gains or a short-term return towards $72 a barrel.

It’s also deadline day for the Takeda/Shire deal with reports that the two companies have finally arrived at a preliminary £46bn deal, with an extension to the deal deadline to 8 May to help in finalising the finer details. Takeda shares fell sharply in Tokyo in the wake of this morning’s announcement on fears the company may be biting off more than it can chew.

EUR/USD – has managed to hold above the key support sitting between the 1.2160 and 1.2180 area, keeping the current range intact. A move back above 1.2320 is needed to argue for a return towards the recent highs. A concerted break through 1.2160 would complete a triple top reversal and target a move towards 1.1800.

GBP/USD – pulled back from lows of 1.3918 yesterday but needs to break back through the 1.4030 area to stabilise in the short term and argue for a return to the 1.4130 level. While below 1.4030 the risk is we get further declines towards the lows this year at 1.3710.

EUR/GBP – currently trading sideways below last week’s peaks at 0.8790, and below the 50 and 100-day MA’s. We have support at the 0.8740 area for now but this could well give way and open up a move towards support at the 0.8690 area. Only a fall back below 0.8680 retargets the 0.8620 lows of last week.

USD/JPY – failed at the 109.20 area yesterday before sliding back. If we are to see further upside we need to push through here. The risk is we could slip back towards the 108.20 area and potentially return to the lows at 106.60.
 

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