Last week saw record highs for the German DAX, FTSE 100 and the FTSE 250, largely as a result of some fairly decent economic data on both sides of the channel, though a disappointing US jobs report did prompt some late profit-taking.
Friday's disappointing non-farm payrolls report was the second time in two months it had diverged from a bumper ADP payrolls number, and poses a particular problem for the US Federal Reserve when it meets in ten days’ time. Over the last few weeks markets have been pricing in the prospect of a June rate rise as more or less a done deal, and while a number of 138k and an unemployment rate of 4.3% is all well and good, and won't stop the FOMC from raising rates next week, the rest of the data on Friday wasn't so encouraging.
To start with, a slide in the participation rate from 62.9% to 62.7%, as well as core PCE well below target at 1.5%, and wage growth that remains stuck at 2.5%, doesn’t chime with a tightening labour market. It also doesn’t chime with the belief that the Fed is behind the curve, and as such could well prompt some concern among some of the more dovish FOMC members, and make the prospect of any further move on rates this year less likely.
This appears to be being borne out in the bond markets where yields are both slipping back and the curve flattening out, while the US dollar has also come under pressure, hitting its lowest levels since last November.
The pound is also expected to remain volatile this week against the backdrop of the tragic weekend events in London and the flakiness of the polls in predicting what the outcome of Thursday’s general election vote is likely to be, with the poll gaps varying between 1 and 12 points in favour of the Conservatives. With fluctuations of this magnitude, Thursday’s outcome is turning out to have all the predictability of a coin toss, and as such it isn’t too surprising to see this being reflected in recent movements in the pound, which did slip back a little in early Asia trading.
Last week the latest PMI data for May showed a continued Q2 rebound in the UK economy, in both the manufacturing and construction sectors. Today’s services PMI is expected to moderate slightly to 55.1 from April’s 55.8.
European equity markets had a rather more mixed performance last week, as Spanish and Italian markets were weighed down by concerns about their banks, with Banco Popular in Spain a cause for concern, as well as Popolare Vicenza and Veneto Banca in Italy.
On the data front the picture was more positive, with manufacturing PMIs continuing to be resilient in May, with the hope that today’s services PMI numbers will be similarly good. Expectations are for Spain, Italy, France and Germany services PMI’s to come in at 57.5, 55.4, 58 and 55.2 respectively.
EUR/USD – the November highs at 1.1300 remain within reach, with broader resistance at 1.1370. The current up move continues to remain stretched, which risks a pullback to 1.1170, and possibly even down as far as the 1.1020 area.
GBP/USD – currently sitting in a range between the 50 day MA and the 1.2750 level and the recent highs at 1.3040. Last week we struggled just above the 1.2920 area, while a consolidated move through 1.3050 has the potential to target the 1.3320 area. Only a move below 1.2750 argues potentially back towards the 1.2600 area.
EUR/GBP – the March highs at 0.8790 remain within reach, with resistance also at 0.8810, while above the 0.8680 area. Only a break below this level has the potential to prompt a drift back down to the 200 day MA at 0.8600.
USD/JPY – Friday’s failure above the 111.60 area has seen the US dollar slide back with support currently at the 110.20 area. A break below this area and May lows could well see a return to the April lows at 108.00.
Heightened market volatility is likely over the election period, which could result in widened spreads. We recommend that you monitor positions carefully, consider the use of appropriate risk management tools and maintain a sufficient account surplus throughout this period.
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