European markets got off to a largely indifferent start to the week, and the quarter, with the FTSE100 setting the early pace with some solid gains, while the DAX slipped back.
The decision by OPEC+ to catch the markets wrong-footed by announcing unexpected production cuts of 1.1m barrels a day from next month, sent oil and gas prices surging yesterday, boosting the energy sector and not much else.
The move by OPEC+ is particularly unhelpful for central banks who, while being worried about sticky inflation, are becoming increasingly concerned about pushing rates up from their current levels. These concerns are especially pertinent given recent worries about financial stability, as yields edge back toward their recent peaks, although the rebound in yields was undone later on by a disappointing US ISM manufacturing report.
This compounded the market's angst given that the cuts seem to be coming as we head into an economic slowdown, raising the question as to whether OPEC+ is either pre-empting a slowdown or merely trying to support prices for its own benefit.
US markets also underwent a similarly mixed session with the Nasdaq 100 finishing the day lower, while the Dow and S&P500 closed higher.
A lot was made of the fact that the Nasdaq 100 had a stellar Q1, gaining more than 20%, while the S&P500 saw gains of 7%. What people didn’t mention was that the top 3 gainers in both these indices were Nvidia, Meta Platforms, and Tesla, with gains of 90%, 76%, and 68.4% respectively, indicating a heavy skew from a handful of outperformers.
It is this skew along with rising uncertainty about the economic outlook that is making it so tricky to call which way markets are likely to break next, with the S&P500 closing at its highest levels since mid-February.
The slowdown in yesterday’s headline ISM manufacturing number was less notable than the breakdown in the component parts, notably the employment component, which fell to its lowest level since July 2020, raising concerns that the US labour market might be on the cusp of slowing sharply.
If weekly jobless claims data are any guide this still seems some way off, and with the March payrolls report due later this week, there seems little reason to panic at the moment. However, given the current situation, it’s not as if the Federal Reserve can step in and cut rates. With inflation at current levels that’s not in the current playbook, while job vacancies are still running at over 10m.
Today’s JOLTs numbers for February are expected to show that vacancies fell from 10.8m to 10.5m, while factory orders are expected to fall by -0.5%.
In a holiday-shortened week the main focus is set to remain very much on the Friday payrolls report, with market reaction having to wait until after Easter.
In light of recent market turmoil, it’s not too surprising to see the Reserve Bank of Australia decide to take a pause when it comes to its own rate hiking cycle, keeping rates unchanged at 3.6%.
That decision became a lot easier last week when a fall in headline inflation back to 6.8% in February suggested that the spike up to 8.4% in December may well have been a one-off giving policymakers’ confidence that a pause was appropriate.
As we look to today’s European open, we can expect to see a modestly higher open, with the only data of note the February German trade numbers and EU PPI for February, both of which are expected to show a slowdown as economic activity slows down.
EUR/USD – even as we saw a bearish reversal on Friday, we saw a sharp retest of the highs yesterday, although we once again failed to move above the 1.0930 level. This failure keeps the bias for further range trading and a possible slide back towards support at the 50-day SMA at 1.0730. A move through 1.0940 opens up the previous highs at the 1.1030 area.
GBP/USD – once again we’re retesting the 1.2425 area with the main resistance sitting at the 1.2445/50 area and the highs this year. A move through the 1.2450 could see a move towards the 1.2660 area. Interim support is currently at the 1.2270 area
EUR/GBP – still capped at the 50-day SMA with support at the 0.8770/80 area and the 100-day SMA. A break below here opens up the risk of a move towards strong trend line support at 0.8720, from the lows last August. On the upside, we have trend line resistance at the 0.8870/80 area.
USD/JPY – slipped back from the 133.80 area yesterday, with a move below the 132.00 area opening up the risk of a move lower and a return to the 130.00 area. A move above 134.00 opens up the 136.00 area.