Despite a big relief rally at the back end of last week, US markets still couldn’t reverse the losses of the previous three days, closing lower for the first time in three weeks, although for European markets it was a somewhat different story.
The DAX finished higher for the fifth week in succession, posting its best daily close since August, as well as coming within touching distance of the 200-day SMA. The FTSE100 also saw a strong session posting its best daily performance since the 4th October, driven higher by unsubstantiated reports that the Chinese government is reported to be looking at a reopening strategy as it looks to navigate a path out of the straitjacket of its current zero-covid policy.
Markets also had to digest what on the face of it looked like a reasonably positive US jobs report which showed that 261k jobs were added in the month of October, and the September jobs number was revised up to 315k. On a slightly more downbeat note, the unemployment rate did edge higher to 3.7%, as wage growth slowed to 4.7% from 5%. The wages number specifically could well account for why the US dollar slid back sharply, as investors weighed the prospect of a slowdown in the rate hiking path, or even more ominously, a slowdown in the US economy.
It still seems more likely than not we’ll see a 50bps hike in December, as opposed to a 75bps move, however if Fed chair Jay Powell is to be believed, the end of rate hikes could well be further into 2023 than originally expected in the wake of last week’s press conference.
The big question as we head into a new week is whether the FOMO optimism that we saw at the end of last week was based on anything more than wishful thinking, when it comes to a China reopening.
Certainly, the progress seen with respect to China agreeing to a deal that allowed BioNTech to supply vaccines to Chinese expats is progress of sorts, as is the tweaking of restrictions around flight suspensions which penalised airlines that brought Covid cases into the country, but it’s an extremely long way from an economic re-opening.
Even in the best-case scenario, any reopening is unlikely to happen much before Q2 next year given the onset of winter, and the likely increased spread of infections that comes with the winter months.
With Chinese officials offering little hint of a change in policy over the weekend the US dollar has rebounded, and markets have remained choppy in Asia, albeit they are still positive as the uncertainty from last week carries over into a new week.
This morning the latest China trade numbers for October showed the extent which China’s zero covid policy is having on its economy as imports declined -0.7% showing once again that internal demand remains weak.
What was especially surprising was a complete collapse in exports which had been expected to remain resilient after rising 4.5% in September. In October exports declined -0.3%, which was the worst performance this year, as well as the worst performance in two and a half years.
The surprise slump also speaks to falling global demand for Chinese goods, as well as the continued disruption in supply chains caused by China’s zero-covid curbs.
The focus this week is set to be once again dominated by the narrative coming out of China, as well as whether we get any further evidence that headline inflation in the US is continuing to slip back. The US mid-term elections aren’t expected to have that much of an effect on the markets.
EUR/USD – rallied hard at the end of last week, pulling off the 0.9730 area and retesting the highs of the week at 0.9975, although we couldn’t break through. This remains a key barrier to a retest of the 1.0090 area.
GBP/USD – rebounded from the 1.1140 area but was only able to reverse some of the losses from Thursday. The main support lies back at the 1.1060 area, with trend line resistance coming in at 1.1540 from the highs of this year.
EUR/GBP – pulled back from resistance between 0.8780/90 area, a break of which retargets the October peaks at 0.8860 area. Support comes in at the 0.8670 area.
USD/JPY – the inability of the US dollar to get close to a retest of the 150 area has seen some weakness in the short term. Friday’s fall saw a sharp fall but unless we break the recent lows at 145.10 trading is likely to be choppy.