Equity markets rallied yesterday as a mixture of the China data, the US-China trade deal, and the Boris Johnson effect encouraged traders to buy into stocks.
In the early hours of Monday morning, Beijing confirmed that on an annual basis, industrial production increased by 6.2% last month, which topped the forecast of 5%, while retail sales jumped by 8%, and economists were only expecting an increase of 7.6%. The solid economic reports add weight to the argument the Chinese economy has turned a corner recently.
The timing of the positive Chinese economic updates was good seeing as at the back end of last week, the US and China confirmed they reached phase one of the trade deal. The two largest economies in the world have been engaged in a trade spat for approximately 18 months, and on Friday it was confirmed that the first stage of the trade agreement was reached.
Also, at the back end of last week, the UK Conservative party won a majority of 80 seats in the House of Commons – the party’s majority since the late 1980’s. The Tory party already agreed an exit plan from the EU so dealers feel the UK should leave the trading bloc in an orderly fashion. The Conservative party is pro-business, and given the majority should be able to govern with relative ease. A combination of all of the above helped the Stoxx 600, FTSE 250 and the S&P 500 hit record highs. This positive sentiment spilled over to Asia as equity benchmarks in that part of the world rallied overnight.
The positive macro-economic and geopolitical stories overshadowed the unimpressive services and manufacturing PMI reports from France, Germany and the UK. The French services as well as manufacturing sector are barely growing, while the German manufacturing sector remains in a deep contraction. The British manufacturing and services reading showed the industries are in contraction.
The dip in the US dollar helped gold out during the day, but the positive move didn’t last too long. The bullish run in equity markets coxed more traders into equities, which is why the metal turned negative. The risk-on sentiment caught up gold, and that’s why it was pushed into the red.
The Bank of England (BoE) stress test was released after the close of the London market yesterday, and all the major UK banks passed the test – the third year in a row that they did so. The tests revealed the finance houses would struggle to maintain their liquidity levels without eating into dividends, and staff bonuses.
At 9.30am (UK time) the UK will release employment data. The unemployment rate is tipped to edge up to 3.9% from 3.8%. Average earnings excluding bonuses are expected to cool to 3.4% from 3.6%. It is worth noting, the latest CPI reading slipped to 1.5% - it’s lowest since late 2016. While average earnings are conformably above the CPI rate that should bode well for the British economy.
US building permits and housing starts are expected to be 1.41 million and 1.34 million respectively. The reports will be posted at 1.30pm (UK time). The housing market is in rude health as the latest building permits update was the highest reading since 2007.
EUR/USD – has been pushing higher since late November and while it holds above the 100-day moving average at 1.1064, it might retest 1.1179. A move to the downside might target the 1.1000 area.
GBP/USD – has been in a bullish trend since early September and if the positive run continues it might target 1.3600. A pullback might find support at 1.3361 or 1.3200.
EUR/GBP – recently fell to a level last seen in July 2016, and if the bearish move continues it might target 0.8200. A rebound in the currency pair might target the 0.8600 area.
USD/JPY – while it holds above the 50-day moving average at 108.64 it could target 110.00. A move back below the 50-day moving average might bring 107.88 into play.