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Growth revisions and trade concerns weigh on global markets

Having found it difficult to push up to new multi-week highs over the last two days, equity markets slid back sharply yesterday as investors started to take money off the table after several weeks of decent gains, with the DAX posting the biggest falls, while the S&P 500 also slipped back after failing to move beyond its 200-day MA.

The tone of the day wasn’t helped by remarks from President Trump’s chief economic advisor Larry Kudlow, that US-China trade talks still had sizeable differences to overcome, while it was also reported that Presidents Trump and Xi would not be meeting, as widely anticipated, before the 1 March deadline, which is when tariffs are due to increase to 25% on a whole range of Chinese goods to the value of $200bn.

If there was a single takeaway from the last few days it would appear to be this. Ever since the US Federal Reserve started to backtrack on its growth expectations for the US economy, the global economic skies, to coin an aphorism from the recent World Bank report, have started to darken further.

This in turn has seen interest rate expectations fall off even further when it comes to the prospect for future central bank policy. The European Central Bank's central case for interest rates has pretty much imploded this week after the latest data from Germany, France and Italy pointed to further economic weakness towards the end of Q4 and the beginning of Q1.

This week we’ve seen the Reserve Bank of Australia shift to a dovish slant, while the Reserve Bank of India have cut rates, over concerns about a slowing economy. Yesterday afternoon the Bank of England followed suit with a set of downgrades, and while not surprising given recent data, it followed hot on the heels of some pretty aggressive growth downgrades from the EU on the prospects for European growth. The downgrade to UK growth and productivity forecasts were significant, but they paled in comparison to the sharp downgrades to European forecasts.

These EU downgrades throw into sharp relief ECB president Mario Draghi’s recent comments to the European parliament that any slowdown would be temporary. This has been a consistent refrain from the ECB for nearly a year now, and yet here we are still seeing gradual declines in economic activity, with the prospect that the three biggest European economies of Germany, France and Italy are all in, or heading for recession.

If anything, the Bank of England’s assessment of the UK economy wasn’t all doom and gloom, despite the "fog of Brexit” which got quite a few mentions, but it was clear that any meaningful forecasting was largely dependent on a benign outcome to the ongoing Brexit talks, which look set to go right down to the wire.

Governor Carney also went on to make clear that there was still the prospect that rates might need to go up in the event of some form of deal in the coming weeks, given that the tightness of the labour market and wages were rising faster than inflation. There were no surprises from prime minister Theresa May’s trip to Brussels, with both sides reiterating their respective positions: the UK wanting the removal of the Irish backstop, or the insertion of a time limit, while the EU insisted that the agreement would not be reopened. There was agreement to reconvene at the end of the month, which means there is unlikely to be a vote on any changes to the withdrawal agreement next week.

Later this morning we’re likely to get another unwelcome insight into the sclerosis afflicting the European economy with the latest German trade numbers, as well as the latest industrial production numbers from France and Italy for December.

The expectations for the Italy and France numbers look rather optimistic when set against the sharp declines seen in the Germany numbers earlier this week. Rebounds of about 0.5% are expected for both, while the German trade numbers will be important on terms of the import and export numbers.

If the sharp drop in imports that we saw in November doesn’t show signs of a rebound in December then that could speak to the German economy falling into recession in Q4 as weakening business optimism starts to weigh on internal demand.

EURUSD – continues to look soft with the risk of a move towards the November lows at 1.1215. We have resistance at the 1.1400 level. We need to see a move beyond the 1.1520 area to signal a deeper move towards the December peaks at 1.1570.

GBPUSD – rebounded from the 1.2850 area yesterday but needs to move above the 1.3020 area to stabilise and argue for a return to the highs of January at 1.3200. A move below 1.2820 argues for a move towards 1.2700.

EURGBP – broken through the 0.8800 area, opening up the prospect of a retest of the 200-day MA at 0.8860, however we need to see 0.8820 crack open first. Still in the range with support back near the 0.8770 level.

USDJPY – the 110.20 level continues to act as a key resistance. We need a break through here to retarget a move towards 111.00. A failure to move above the 110.20 level keeps the onus on fall back towards the 108.20 area. Above 110.20 argues for a move towards 111.00.


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