European stocks closing the quarter in a rather subdued fashion doesn't change the fact that we’ve still seen a fairly positive start to the year, with record highs for US and UK markets.
This has been despite concerns of political instability in Europe, the health of the banking system, and the first faltering steps of a Trump presidency, not to mention last week’s triggering of Article 50.
While European markets have lagged behind the DAX still remains within touching distance of its record highs of April 2015, as it looks to post new records itself.
We’ve no doubt been helped in these gains by a decent start to the year for the global economy, and this at the end of last week with some decent manufacturing data from China which has rounded off a fairly decent Q1 for the Chinese economy.
Despite the solid gains seen so far this year there is some evidence that the rally in US markets is looking a little tired given President Trump's trials and tribulations in Congress, and the reflation trade is likely to face a new test this week the US president entertains the Chinese leader Xi-Jinping at his Mar-a-Lago golf course in Florida, which in the words of President Trump himself could be a little “difficult”.
We also have the latest Fed minutes in the wake of the March rate hike, which could well shed further light on US policymakers decision to hike rates but leave their inflation and growth forecasts unchanged.
Before that though we have a data heavy week which will shed a lot more light on how the global economy ended Q1 on the growth front, and in particular the rebound in global manufacturing which has surprised with its resilience. Today we get the latest manufacturing PMI numbers for March from Japan, Europe, the UK and the US, following on from Friday’s decent China numbers. In Japan the manufacturing sector showed expansion of 52.4, a slight dip from February, while the latest Tankan survey improved on its February readings.
Later this morning we get the latest numbers from Spain, Italy, France and Germany, all four of which have shown a steady improvement since the beginning of the year, and which are expected to come in at 54.6, 55.2, 53.4 and 58.3 respectively, helped in no small part by the weaker euro.
While Italy’s PMI numbers have shown some decent strength in recent months, unemployment continues to remain eye-wateringly high at 11.9%, at a time when the EU rate is expected to come down further to 9.5%, from 9.6%. Unfortunately for EU leaders, while unemployment may be at record lows in Germany it can’t come down fast enough in countries like France, Spain and Italy, where it still remains well above 10%, while youth unemployment rates remain much higher, well in excess of 20%.
In the UK we are also expected to see a similar pick-up into the end of the quarter with an improvement in manufacturing PMI to 55.1, up from 54.6 in February, in what would be a strong start to the year.
We finish up the day with the latest ISM manufacturing numbers from the US for March, on the back of a decent Chicago manufacturing number last week. The ISM numbers are generally a good barometer for the broader health of the US economy, and the latest manufacturing survey should show a decent 57.2, down slightly from 57.7 in February.
There is a small concern that the weak employment component seen in last week’s Chicago numbers might also translate in to a similar weakness in the ISM employment component. We shall see but a weak number here could well be reflected in this week’s US March employment report which is due on Friday.
EUR/USD – sliding below the 50 day MA at 1.0680 could well see the euro slip further towards the 1.0600 initially and potentially 1.0580. We need to get back above the 1.0780 level to stabilise.
GBP/USD – a third successive weekly rise saw the pound close above the 1.2500 area, as well as posting its first positive quarter since Q2 2015. This could well signal further gains towards 1.3000 on a break above the February highs. Only a move below the1.2350 area would call this into question.
EUR/GBP – has continued to decline, pushing below 0.8550 and looking for a retest of the previous lows at 0.8400. We also have support at 0.8450, a trend line from the December lows. We need to get back above 0.8550 to stabilise.
USD/JPY – last week's rally fizzled out at the 112.20 area before sliding back below 111.60. This keeps the prospect of a move back towards the 110.00 area on the table. Only above 112.50 the risk of a move back towards the 110.00, as well as the 108.50 area diminishes.
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