It was contrasting week for US and European markets last week, with the Dow and S&P500 once again setting the pace with more record highs, while European stocks lagged behind, finishing the week lower, despite a valiant attempt to recoup their losses from an early week sell-off.
The recovery in the latter part of the week was largely driven by company earnings that were largely better than expected, and reduced concerns over an Evergrande default after the under pressure Chinese property developer paid its outstanding $83m interest payment on an outstanding US dollar bond.
One of the more notable takeaways from the earnings reports seen so far has been the ability of companies, for the most part, to pass on increases in prices onto their customers without seeing a drop in sales, however investors are also having to cope with an everchanging backdrop when it comes to what the economy might look like as we head into year end.
There are rising concerns around new and increasing Covid outbreaks all around the world. In China, which is already battling a slowing economy, an increase in infections is prompting some cities to shutdown transportation services, while Singapore has already implemented another lockdown. In the UK the volume is also being turned up a notch on tightening restrictions to protect the NHS from being overwhelmed again.
As we look ahead to a new week investors will be hoping the positive earnings narrative can continue, however Snap’s disappointing numbers on Friday have shone a light onto a possible canary in the coalmine for the rest of the tech sector, with a bonanza of big tech earnings out in the coming days, and any disappointment from the likes of Facebook, Amazon, Apple, Alphabet and Microsoft could see the mood sour, quite quickly.
Facebook and Alphabet are likely to be closely watched after Snap’s numbers last week, which saw the shares slide over 25%, after the company painted a bleak picture for advertising revenue over the next quarter, on a combination of the privacy changes implemented by Apple, and lower marketing spend by companies, over concern that they may not be able to deliver the products as advertised due to supply chain issues.
Facebook is due to report later today, and Alphabet tomorrow.
After Friday’s strong US finish, markets in Europe look set to see a positive open in what is also set to be an important week for macro-economic data, with EU and US Q3 GDP, and the rate meetings from the European Central Bank and the Bank of Japan, while in the UK, the Chancellor of the Exchequer will be delivering his Autumn Budget.
Last week’s flash PMI numbers from Germany showed a rather mixed picture when it comes to the wider economy. Services activity fell to its lowest level since April, while manufacturing fell back to 58.2, its lowest level since January, but still surprisingly resilient when you consider how many companies have slowed their production output due to supply chain disruption.
Nonetheless German business confidence has still been on the decline since the peaks in June, sliding to a four-month low of 98.8 in September. This trend looks set to continue in today’s October numbers with another decline to 98, although given that this will be the first survey post last month’s German election, we could see an upside surprise as the worst-case scenario of a left leaning coalition became much less likely.
This would be due to the presence of the more fiscally conservative FDP acting as a moderating influence on the worst excesses of any new administration.
EUR/USD – has managed to hold above the 1.1610 level for the past few days with a break of 1.1600 targeting a move towards 1.1560. We need to break above 1.1680 to crack on towards 1.1760. Below 1.1520 targets the 1.1450 area.
GBP/USD – last week’s failure to move above the 200-day MA at 1.3840, raises the prospect of a move towards 1.3720, and the 1.3670 area. The bias remains for a move towards the 1.3900 area on a move through 1.3850.
EUR/GBP – the failure to move below the 0.8420 area, prompted a sharp snapback on Friday. We need to break above the 0.8470 level to target the 0.8520 area. A break below the 0.8400 area targets the 0.8280 level.
USD/JPY – last week’s failure to crack through the November 2017 peaks at 114.75, has seen a pullback, with the 113.20 level the next support, followed by the 112.40 area.