Both markets in Europe and the US saw a positive start to November, with the FTSE100 pushing above 7,300 for the first time since February 2020, while US markets once again set new records, in a year that has seen the S&P500 set a new record high every month this year.
With 80% of companies in the S&P500 so far beating expectations on earnings, concerns about rising prices impacting company profit margins are for now being set aside, with consumers seemingly being able to absorb their impact.
Whether this trend can continue is obviously a moot point, with central banks seemingly intent on starting the withdrawal process of some of their stimulus measures, however for now the path of least resistance would appear to be for further gains for stock markets, as long as central banks don’t overplay their hand.
In the last few weeks, we’ve seen the Norges Bank and the RBNZ raise rates, the Bank of Canada end its asset purchase program, while this morning the Reserve Bank of Australia came out and while they kept rates unchanged, the central bank scrapped its April 2024 ,0.1% government bond yield target, while also saying that the conditions for any rate rise could well take some time.
This has prompted a bit of a pullback in short term Australian yields with the 2 year falling back briefly below 0.7%, however while the RBA has come across as less hawkish than expected it doesn’t change the fact that a rate rise is perhaps nearer than the RBA is currently prepared to admit at this time.
RBA Governor Philip Lowe did admit that a rate rise could well come as soon in 2023, moving from 2024, but for now the latest data and forecasts don’t support a move in 2022. This pushback by the RBA isn’t unexpected given how much yields have moved in the last few weeks, and is therefore an understandable corrective, with Lowe saying that Australia doesn’t have an inflation problem. Unfortunately for him the markets seem to have a different view and if prices continue to remain elevated the RBA will probably have to shift position again.
The sharp rise in Australian short-term yields over the past week or so more or less teed up the prospect of some form of action this morning, and the abolition of yield curve control this morning is part of that. Nonetheless it’s a remarkable turnaround in sentiment from two months ago, when the central bank extended its QE program into February at a reduced rate of A$4bn a week.
This neatly tees us up for the conclusion of tomorrow's Federal Reserve policy decision when the central bank is set to sketch out its timetable to taper its own $120bn bond buying program, followed by the Bank of England on Thursday, where it’s almost certain there could also be a modest tweak to the policy settings.
As we look ahead to today’s European open, we can expect to see a fairly flat open, as we look ahead to the latest manufacturing PMI numbers for October from Spain, Italy, France and Germany, all of which are expected to see a modest softening in economic activity, with Spain expected to come in at 58.1, Italy, 59.6, France, 53.5 and Germany 58.2.
EUR/USD – currently trading between support at the 1.1520 area and the 50-day MA at the 1.1700 area. We need to get back above the 1.1620 area to retarget last week’s high, or risk a break below the October lows and a move towards the 1.1460 area.
GBP/USD – continues to slip away from the 50-day MA at 1.3720, potentially opening up a move back towards the 1.3570 level. We need to see a move back above 1.3730 to stabilise.
EUR/GBP – has moved back above the 0.8480 area with the risk now we could head back towards the 0.8520 area. A break below the 0.8400 area targets the 0.8280 level.
USD/JPY – still has resistance at the November 2017 peaks at 114.75, a break of which opens up 116.00. The 113.20 area remains key support, followed by the 112.40 area.