European equity markets got off to a solid start to the new week yesterday as investors looked past the negativity of last week and chose to focus on the expectation that the Omicron variant, while more transmissible, may well not be as virulent as the Delta variant that is wreaking havoc across Europe.
Indications so far still show that it isn’t prompting a big rise in hospitalisations and deaths, raising the hope that while it may be as transmissible as the common cold, that could be as bad as it gets.
That hope certainly appears to be what drove yesterday’s market gains, with the FTSE100 hitting its highest levels since 26th November, however as the last week has shown us, while sentiment has been shown to be positive on one day, it doesn’t take too much to flip it on its head, and turn it negative the next.
Unlike last week, US markets carried on the gains from markets in Europe, led by the Russell 2000, with the Nasdaq lagging, while yields which fell sharply on Friday, recovered most of their lost ground.
The positive tone carried through into Asia this morning, as investors reacted to the 0.5% cut in Chinese reserve requirements yesterday, as well as this morning’s November trade numbers from China, which showed that domestic demand was bouncing back.
In recent months Chinese exports have held up well due to businesses ordering early so that they can build up their pre-Christmas inventory levels, with machines and electrical goods seeing strong demand. This recovery trend has continued for the fourth month in a row as exports climbed by 22%, beating expectations of 20.3%.
Imports also picked up, helped by inventory rebuilding as well as decent demand around “Singles Day” rising 31.7%, against an expectation of 21.5%. A rebound in coal imports to deal with an energy shortfall as well a higher demand for copper also helped boost the data.
In Australia, the Australian dollar continued to squeeze higher after the Reserve Bank of Australia painted a more positive outlook for the economy, raising the prospect that rates might increase earlier than Governor Philip Lowe’s previous guidance of 2023.
As we look towards this morning’s European open, we look set to see another positive start, as we look ahead to some more economic data out of Germany.
Yesterday saw German factory orders data for October undergo a sharp -6.9% decline in October, which suggests that expectations of a rise of 1% in October industrial production, due to be released later this morning, might be wishful thinking.
We also have the latest German ZEW investor survey for December, which given the recent declines seen in the DAX, along with the deteriorating health situation across Germany is unlikely to be a positive outcome.
The current situation index is expected to fall to its lowest level since June, when it was in negative territory, with a decline from 12 5 to 5.7. The expectations index is also expected to decline from the improvement that we saw in November and could well fall below lows so far this year we saw in October when it came in at 22.3.
The final iteration of EU Q3 GDP is expected to be confirmed at 2.2%.
EUR/USD – while resistance at the 1.1385 level, caps the risk is for a move lower. The key support remains at the November lows at 1.1185, as well as the 1.1160 level. A move through 1.1420 argues for a move back to the 1.1520 level.
GBP/USD – currently holding above the bottom of the channel just below 1.3200 near to the 1.3160 support, with the lack of a rebound a bit of a concern. A break of 1.3160 opens the 1.3000 level. We need to recover back above the 1.3400 level to stabilise and move towards the 1.3500 level.
EUR/GBP – slid back from the 200-day MA yesterday as well as trend line resistance from the September 2020 highs, at 0.8560. Support remains at the 0.8480 level and needs to break below this level to diminish the risk of further gains.
USD/JPY – the 112.50 level still looks solid for now, but the rebound being seen needs to overcome the 113.70 area to target a move back to 114.30. A move below the 112.50 level targets the 111.80 area.