While Spanish stocks slipped back the rest of Europe edged higher yesterday but it was a pretty feeble attempt with little in the way of conviction. Even US stocks struggled to build on last week’s gains, slipping back for the first time in six days, despite posting new record highs first.
This late slide in US markets looks set to translate into a negative open for European markets this morning as investors weigh up the risks that political fragmentation could start to translate into a slowdown in the economic recovery story that has so far characterised this year in Europe.
The return of fractious politics across Europe after the surprise results in Austria and the Czech Republic, along with the complete mishandling of events in Catalonia by the Spanish government appears to have uncorked a problem that is likely to prove to be extremely difficult to resolve.
The Italian government appears to have provided the template for a less fractious model in dealing with recalcitrant regions, and while the outcome in Lombardy and Veneto was non-binding at least there is probably less likelihood of an eventual outcome blowing up in central governments face.
The same is unlikely to be the case in Catalonia, certainly not in the short term.
The US dollar had another positive day yesterday, hitting a three month high against the yen on speculation about further easy monetary policy from the Bank of Japan, after Shinzo Abe’s re-election for a new five year term, and who the new head of the Federal Reserve might be, focussed traders’ minds.
President Trump’s continued toying with the markets over his choice about the new Fed chair includes the current incumbent Janet Yellen, he who said he “likes a lot”, however Stanford economist John Taylor and current Fed board governor Jerome Powell are also in the frame.
It would be a surprise if Trump decided to appoint Yellen again given his criticism of the Fed twelve months ago, before he became President, which suggests that it is more likely he will probably go with Powell, largely down to the fact he is already on the board, is probably the more dovish of the candidates and already has pre-existing relationships with the rest of the FOMC, which would make any transition fairly smooth.
Back in Europe the latest flash manufacturing and services PMI’s from France and Germany for October are expected to point to the continued rebound in economic activity in both countries though we may see a slight slowdown in manufacturing after the really strong performance in September seen in both countries. Germany is expected to slow slightly from 60.6 to 60.1, while French manufacturing is expected to remain at 56.2. Services are expected to remain steady at 55.6 and 57 respectively.
EURUSD – failed at the 1.1870 level and has slid back with the prospect that we could slip back to the 1.1720 area and retest the lows this month at 1 1670 area
GBPUSD – a brief dip below 1.3100 last week saw a rebound to the 1.3200 area, but downside risk towards 1.3020 remains a risk. We need a move back the 1.3340 area to retarget the 1.3420 area.
EURGBP – two failures above the 0.9000 area last week and the 50 day MA has seen a drift back lower. We could see a drift back towards the 0.8870 level and then a further fall towards the 0.8780 area.
USDJPY – looks set for a retest of the range highs in May and July at 114.40, with a break targeting 115.60. Below the 113.40 area retargets the 112.40 level.
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