US markets were unable to sustain the rebound that we saw on Friday closing lower last night as concerns about tighter US monetary policy and lower guidance expectations contrived to keep investors cautious. Thus far US earnings season has got off to a fairly positive start with some decent numbers from JP Morgan, Citigroup and Bank of America, however given that interest rates are edging higher, and the US economy is growing strongly, banks should be doing fairly well.
There is still an element of caution prevailing in the market at the moment, something that was illustrated with some capital flows into gold yesterday, which saw the yellow metal hit its highest levels since July.
European markets managed to buck the trend of a weak Asia and US session, closing higher yesterday, however the move up was on pretty low volume and as such needs to be treated with an element of caution.
In Asia the latest Chinese inflation numbers for September showed a slight increase in prices, from 2.3% coming in at 2.5%, while PPI prices slipped back to 3.6% from 4.1%, in signs that inflationary pressure in the world’s second biggest economy may be slowing .
Today’s European focus in likely to be on Italy where the Italian government is set to approve the new budget for 2019, which is set to see a deficit of 2.4%, and draw the ire of the European Commission. While below the 3% deficit ceiling, high debt countries are required to come in lower than that in an effort to make the existing debt more sustainable. The Italian government are no doubt hoping that the EU Commission will blink when it comes to a possible confrontation and hope the markets do its job for them. The EU will need to tread carefully given that the budget appears to be popular, and won’t want to be seen to be heavy handed, thus risking a backlash from its third largest economy.
The latest German ZEW survey for October is expected to reflect a more pessimistic outlook for economic sentiment given recent declines in the German stock market as well as weaker economic data, with expectations of a fall to -12.6 from -10.6.
While the pound continues to whip around on the back of every Brexit related headline, we could see some more headlines when the UK cabinet sits down today to mull over the breakdown in Brexit talks over the weekend. It is highly unlikely that Prime Minister May will be able to coalesce a range of differing opinions about how to proceed next. The Irish border backstop continues to be the Gordian Knot that can’t be unravelled and will in all likelihood scupper any prospect of any sort of agreement this week. The divisions are simply too great, given the party and parliamentary arithmetic, which means the can will likely get kicked further if she wants to keep her cabinet intact.
Fortunately in spite of the politicians the UK economy has continued to hold up reasonably well, with the latest data from Q3 set to rival the performance of the economy in Q2.
This outperformance came about despite an unwelcome spike higher in the inflation rate for August which saw headline CPI unexpectedly rise to 2.7% from 2.4%, driven primarily by higher energy prices, clothing and other transport and recreational culture costs. This is particularly unwelcome given how wages have struggled to move higher in recent months.
Fortunately, there does appear to be some signs of progress on that front, though you wouldn’t know it to listen to some of the political discourse. The biggest worry remains as to whether it is sustainable and that is something we should get some further clarity on later this morning, with the release of the latest wages and unemployment numbers.
Last month wages growth for the three months to July managed to match the highest levels this year, on a three-month basis, and the highest levels since 2015 at 2.9%, up from 2.7%. On a single month basis wages rose 3.1% in July, raising expectations that a tightening labour market is finally translating into rising wage pressure. Today’s wages data, excluding bonuses, for the three months to August is expected to remain steady at 2.9%, however there is a chance given July’s single month numbers that we could see a 3% print for the first time since 2015.
The unemployment rate is expected to remain steady at 4%, particularly given that job vacancy rates appear to be remaining steady.
EURUSD – currently struggling to break up above the 50-day MA and the 1.1620 level in the wake lf last week’s rebound from the 1.1460 area. A sustained move through the 1.1600 area retargets the 1.1720 level. The 1.1500 area is likely to act as support for pullbacks.
GBPUSD – rebounded from the 1.3080 level yesterday, after last week’s failure at the 1.3260 level but remains in the uptrend from the August lows at 1.2660. We need to recover back through the 1.3200 level to minimise the prospect of a move back to the 1.3080 area, and further weakness towards the 1.2980 area and the 50-day MA.
EURGBP – drifted back from 0.8825 yesterday with broader resistance at the 200-day MA at 0.8840, and 0.8870, but still remains in the downtrend from August peaks. Support remains at 0.8720 and below that at 0.8640.
USDJPY – trend line support at 111.60 from the March lows currently supporting the price action after last week’s reversal from the 114.60 level. A break below 111.50 suggests the prospect of further losses towards 111.20, and even the 200-day MA at 110.35. The 114.60/70 level remains a key resistance level and obstacle to further upside.
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