Friday’s sell off marked the end of a disappointing week for markets in Europe, as well as the US after Fed chair Jay Powell signalled that the Federal Reserve could well go much harder, and a lot quicker when the central bank pulls the trigger on the first of what might be several 50bps rate hikes, starting next month.
The sell-off in the US accelerated sharply after European markets closed on Friday, with the Dow posting its worst one-day decline since the early part of 2020, while the Nasdaq 100 and S&P500 fell equally as hard, closing lower for the third week in a row.
Friday’s sharp selloff is expected to translate into a similarly weak open for markets in Europe, after Asia markets followed suit as it became clear that China’s covid concerns are far from over, with no boost for French markets from Sunday’s French election result, which looks to have gone the way of Emmanuel Macron.
This was after his challenger Marine Le Pen conceded defeat. The result thus spares investors the anxiety of what a Le Pen presidency might have wrought, however the result has also highlighted how divided France has become.
When Macron was elected President in 2017, he was touted as the great hope to break the stale mould of the old political elites in France. Having overseen a turbulent five years, the divisions have got worse with the President widely perceived as arrogant and aloof, with a lot of voters perceiving him as being the least bad option, in a stark contrast to how he was received 5 years ago.
Now it’s less a case of the Emperor’s New Clothes and more a case of same old tatty outfit, with a slight rebrand.
Having secured a second term, with a lower share of the vote, he’ll now have to look at securing a majority in the National Assembly elections, which are to be held in June.
Having spent most of the last few weeks trying to put to one side concerns about events in eastern Europe, a slowdown in China, and the increasing risks of what inflation might do to company earnings, as well as consumer incomes, the final straw appears to be a concern about the prospect of a policy mistake by central banks, and a possible recession by the end of the year.
For most of the last few months, we’ve not seen much in the way of evidence that rising prices was having a significant effect on consumer spending, however that appears to be changing if some of last week’s economic data, as well as disappointing earnings reports, are any guide.
The surge in energy, as well as food prices, has started to see consumers prioritise where they spend their money, and last week’s poor UK retail sales numbers look set to be the first of many economic reports, which may well see a similar trend.
This week we get the first iterations of Q1 GDP from the US, as well as Germany, France, Italy, and Spain, all of which are expected to see a sharp slowdown from their Q4 numbers, as rising prices, and tangled up supply chains push up costs for business as well as consumers.
Today’s German IFO survey for April is expected to reinforce that further, with further weakness expected after a shocker of a survey in March.
Against a backdrop of rising costs and factory shutdowns, along with its key export markets of Russia being shut down, as well as the Chinese economy undergoing a self-induced covid-19 circuit break, the March German IFO survey was an absolute shocker.
Economic activity cratered in the face of surging energy and producer prices, with the Institute claiming that sentiment in the German economy had collapsed, a trend that so far hasn’t been reflected in recent flash PMI numbers.
The business climate fell to 90.8 and its lowest level since January 2021, while on the expectations index sentiment fell from 98.4 to 85.1, the biggest single month fall since March 2020. Today’s April report is expected to be as equally as bleak with the business climate falling to 89, while the expectations index expected to fall to 83.5, although these are still levels that are above the levels, we saw at the time of the first Covid lockdowns.
EUR/USD – the inability to break above the 1.0935 area last week keeps the bias towards the downside, with a break below 1.0750 targeting a move towards the March 2020 lows at 1.0635.
GBP/USD – last week’s break below 1.2950 has seen the pound fall back to the 1.2820 area which is also a 50% retracement of the move from the 2020 lows at 1.1410, to the peaks last year at 1.4240. A move below 1.2780 targets the 1.2490 area. We now have resistance at the 1.2970/80 area and previous support.
EUR/GBP – having failed once again to sustain a move below 0.8250 the euro squeezed back to 0.8420 area on Friday. We could see a move back to the 0.8470 area; however, it appears we are in a range between 0.8500 and 0.8200.
USD/JPY – currently have resistance at the highs last week at 129.40. If we can’t get back above 129.00, we could slip back towards the 125.80 area in the short term, as profit taking kicks in. The main support lies all the way back down near the 124.70/80 area.