European markets managed to snap their five day losing streak yesterday, as some cautious buyers returned to the fray after the worst run of daily losses so far this year. The big question remains as to whether this is merely a pause in the context of a wider correction or whether we’ll see a resumption of the uptrend that has been in place since the beginning of 2016.
Having seen sharp declines last week it remains to be seen whether we’ll see two successive weekly declines for markets in Europe, as we head into the weekend.
US markets on the other hand which have only drifted off modestly in the past few days rebounded strongly, with the Nasdaq making another record close and proving once again that US markets have a mind of their own, when it comes to diverging from the rest of the world. The gains in the US were helped by reports that US politicians passed a bill in the House of Representatives aimed at cutting US company rates from 35% to 20%. As is normal the optics are more important than the actual reality, with the prospect of getting the bill into law by way of the Senate still slim in the short term.
The passing of yesterday’s bill also helped the US dollar close near its intraday peaks yesterday, while also helping push up US yields with the 2 year yield hitting its highest level since October 2008. These US dollar gains were pretty short-lived and soon gave way to selling on reports that Trump officials had been subpoenaed by special attorney Robert Mueller as part of the investigation into Russian involvement in the Trump Presidential campaign. This sent the US dollar sharply lower against the yen, dragging on the Nikkei as well as pushing the euro above 1.1800 and the pound to a two week high above 1.3200.
Oil prices which have in the past few days started to show signs of running out of steam after hitting two year highs earlier this month have stabilised, ahead of this month’s OPEC meeting where it had been expected that the output cut extension agreed a year ago would be extended well into next year. Recent chatter has suggested that Russia isn’t particularly enthused about this prospect, and along with concerns about faltering demand, we could well see further price falls in the coming days.
The bullish case also wasn’t helped by the IEA cutting its demand forecasts for this year and 2018, just before this week’s US inventories showed a surprise rise in both crude and gasoline stocks. This suggests that for all of OPEC’s attempts to get supply and demand back into balance, US shale producers could upset the oil drum, as they ramp up their output.
EURUSD – this week’s failure just below the October peaks at 1.1880, has seen the euro slide back. The nature of the move suggests some failing momentum, which could see a move back to the 1.1700 level. While above 1.1700 the risk remains for a return towards 1.1910 and the recent peaks above 1.2000.
GBPUSD – we need to push up through the 1.3230 level or run the risk of a run down through 1.3100 and a return to the 1.3030 area. A move below 1.3120 opens up the prospect of a retest of the range lows at 1.3030. A move below 1.3000 argues for a move towards 1.2930.
EURGBP – failed just shy of the October peaks at the 0.9020 area this week before slipping back below the 100 day MA. This fall back below the 100 day MA at 0.8940 could see a return to the 0.8870 level on a break of 0.8910.
USDJPY – has found some initial support at the 112.40 level but we need to move through the 113.20 area to retarget the 114.50 range highs. If we break below the 112.40 area then 111.20 becomes the next target.
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