Despite a negative European session, yesterday’s dip in US markets lasted all of about a few hours as investors put aside their concerns about some soft earnings and an escalation in the political crisis in Spain, to push both the Dow and S&P500 into positive territory for the day.
It would appear that whatever concerns investors have about rising political risk, bullishness about the US economy continues to trump everything, forgive the pun. Weekly jobless claims at their lowest level since 1973, and another bullish manufacturing survey, along with the increased prospect of a new Fed President who is likely to lean more to the dovish side helped yesterday’s US rebound.
Reports from administration officials that President Trump is leaning towards incumbent Fed governor Jerome Powell as the new Fed chair helped push the US dollar lower, along with bond yields and helped keep a floor under stocks. A continuity candidate who favours a more gradualist approach to monetary policy would appear to be the best of both worlds for US investors, though it’s probably not as positive for the US dollar.
European markets look set to benefit from last night’s US rebound, though Spanish markets look set to lag, particularly since it seems likely that the Spanish government will start proceedings over the weekend to wrest control of Catalonia’s institutions by implementing article 155 of the Spanish constitution. The Catalan government has already stated that they would unilaterally declare independence under such a scenario in defiance of Spanish law, and invoking a constitutional crisis.
While the EU continues to treat events in Spain as an internal matter, the political undercurrents rippling across Europe show an EU that is pulling in the opposite direction from where French President Macron and German Chancellor Angela Merkel would like it to go.
Even without last weekend’s Austrian election result we also have in Italy this weekend two non-binding referendums taking place in Lombardy and Veneto where both regions are asking for greater fiscal autonomy from Rome on a number of issues. Across Europe there appears to be a growing desire for more local control and less supranational control as voters tire of the unaccountability of politicians hundreds of miles away.
The pound had another disappointing day yesterday coming under pressure again after retail sales declined 0.8% in September, further raising concerns as to whether the Bank of England would follow through on its warnings that rates might have to go up in the coming weeks. Gilt yields slid back as doubts started to creep in that the bank would be able to justify a rise at a time when the economy starts to look a little soft.
It is certainly clear that a rate rise does not enjoy the support of some on the current monetary policy committee, however given chief economist Andrew Haldane’s comments in the summer that too low interest rates could cause inflation to become entrenched appear to have caused some concern in some parts of the committee. If, as governor Carney articulated earlier this week, inflation does go above 3% next month, then caution would suggest that rates should rise next month. The biggest problem will be obtaining the required five votes to push it through, and reverse the rate cut from August 2016.
Today’s UK public sector borrowing numbers are expected to show an increase to £5.7bn in September from £5.1bn in August.
EURUSD – continues to edge higher and could extend to the 1.1920 area, though we also have resistance at the 1.1870 level. Below support at the 1.1730 area retargets the lows this month at 1.1670.
GBPUSD – while above the 1.3120 level the upside remains intact, though we also have support at the lows this month at 1.3020. We need a move back the 1.3340 area to retarget the 1.3420 area.
EURGBP – continues to edge higher with the 50 day MA just above 0.9005 the next resistance. A break through 0.9030 retargets the 0.9100 area. Support comes in at the 0.8870 level.
USDJPY – yesterday’s failure above the 113.10 level keeps the current range intact, with only a break above the 113.40 area targeting 114.00. Pullbacks should fund support at this week’s lows at 111.60.
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