European markets had a fairly positive day yesterday, as we come to the end of another record breaking month for equity markets. Despite the fallout from a new series of political surprises across Europe, the Teflon rally that we’ve seen since the beginning of the year shows no signs of slowing down apart from the occasional pause, with markets across Europe set to post significant gains in another good month for stocks.
There does appear to be some profit taking starting to kick in as we come to the end of the month with a weak Asia session though that hasn’t been helped by some weaker than expected Chinese PMI data which came in slightly softer than expected.
One outperformer yesterday was the Spanish stock market, which has undergone a significant number of convulsions this month as a result of the constitutional crisis, looks set to post a decent month hitting its highest level since mid-August, in the wake of Catalan President Puigdemont absconding to Belgium as Spanish prosecutors issued indictments for his arrest for sedition along with a host of his other Catalan co-conspirators.
With new elections now set to take place just before Christmas and the air hissing out of the Catalan independence battle as Catalan officials showed little appetite to push back against article 155, it would appear that attention is now turning to the elections which are due to take place on December 21st.
While Spanish PM Rajoy is no doubt patting himself on the back for what it appears is a clever move to divide the opposition he should remind himself that if he’d handled events differently on 1st October, these elections probably wouldn’t be necessary and Catalan society wouldn’t be half as divided as it appears to be now. As it is the actions of Spanish prosecutors in going after Catalan officials in such a heavy handed fashion could well backfire if it succeeds in making martyrs of them.
This morning’s Bank of Japan rate meeting hasn’t sprung any surprises, despite the recent election win of Japanese Prime Minister Shinzo Abe for another five year term. While it is no surprise that the Bank of Japan has kept monetary policy unchanged, Abe’s win has made it more likely that the central bank will keep its foot in on the stimulus accelerator as the new government looks to take advantage of their new mandate to fire the long awaited third arrow of structural reform.
Recent economic data has shown that the Japanese economy is in much better shape than it has been for some time, but inflation still remains well below target, and the bank appears to expect it to remain so, after guiding its short term inflation forecast down, while wages have also continued to lag behind, despite an economy that is almost at full employment.
With the Nikkei 225 also at 21 year highs officials are likely to want to keep that momentum going and as such will be hoping that the Japanese yen continues to weaken further.
The pound had a decent day yesterday after the sharp falls seen at the end of last week, over doubts that the monetary policy might bottle this week’s rate decision. Markets still assign an 86% probability that the Bank will raise rates for the first time in ten years this Thursday, which means the consequences of not doing so are likely to be brutal on the pound. Yesterday’s consumer credit numbers showed that borrowing slowed slightly in September but not worryingly so. The latest Gfk consumer confidence did show a slight fall in October to -10 as consumers slowed their spending ahead of the Christmas period, though business confidence does appear to be holding steady for the time being.
EURUSD – has found some support at the 1.1570 area, but the break below 1.1670 opens up the prospect of a move towards 1.1230, completing a head and shoulders top reversal. Initial target is a move towards 1.1390 while any pullbacks need to overcome the 1.1680 level to reduce downside risk.
GBPUSD – the 100 day MA is currently acting as support while just below that we have trend line support from the March lows which comes in at the 1.3030 area. We need a move above the 1.3220 area to retarget the 1.3340 area.
EURGBP – slipped below trend line support from the November 2015 lows at 0.8825, and opens up the potential for a test of the 200 day MA at 0.8755. We need to recover back above the 0.8870 level to argue for a return to the 0.8920 area.
USDJPY – last week’s failure at the 114.40 level keeps the current range intact, with a break targeting the 115.60 area. Support comes in at the 113.20 area and last week’s low, with a break retargeting the 112.40 area.
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