After what turned out to be a very choppy month, and some very sharp falls at the beginning of March, European markets still managed to finish the month broadly higher, building on the gains seen in January and February.
The only exception to this was the FTSE100 which gave up a good proportion of its early quarter gains, being the only major European index to finish the month lower, largely due to its heavier weighting of banks and energy companies, closing the quarter a mere 2.4% higher. This compares unfavourably to its European counterparts which saw quarterly gains in excess of 12%.
US markets also had a divergent quarter, with the Dow finishing the quarter flat, while the Nasdaq 100 rebounded over 20%, closing at 7-month highs, and above its previous resistance at 12,900. The S&P500 in contrast saw a quarterly gain of 7%.
As we look ahead to a new month and a new quarter, and last week’s rebound the main question is whether we’ve left the trials and tribulations of March in the rear-view mirror or whether last week was the eye of the storm before the onset of further volatility.
Concerns over a banking crisis may well have receded in the last few days, however, the cosy narrative that rising interests are a positive for the banking sector received a bit of a wake-up call in the last few weeks.
This shift in the narrative has also served to jolt central banks into a greater awareness of the risks of jacking up rates too quickly in response to an inflation problem, that on the headline level appears to be starting to recede.
The bigger problem they now face is stickier core inflation and what to do about that, and in that, the answer is less clear-cut.
Last week we saw US PCE Core Deflator slow to 4.6% in February from 4.7%, which while welcome still puts it at the same level it was at the end of last year. The latest flash EU CPI numbers for March saw better news on the headline rate, sliding from 8.5% to 6.9%, however, core prices went in the opposite direction rising to a new record high of 5.7%, thus presenting the ECB with a tricky balancing act to resolve.
In response to the recent turbulence, bond markets have shifted tack quite significantly from the hawkishness of early March to pricing in a much lower terminal rate, with the potential for rate cuts as soon as the summer.
This seems mightily over-optimistic and also optimises how fickle markets have been in recent weeks. Nowhere is this fickleness better illustrated than in the movement of the US 2-year yield over the past month, trading between a peak of 5.08% to a low of 3.55%, and closing at 4.02%, with many days seeing price swings of 20bps.
The reality is that inflation is unlikely to be receding any time soon short of an economic collapse, and with OPEC+ unexpectedly announcing at the weekend that they would be cutting output by 1.1m barrels a day from next month could well see the economic boost offered by the recent fall in energy prices start to reverse if this morning’s surge in oil prices gains traction and starts to head towards $100 a barrel.
At such a fragile stage of the recent recovery in optimism, it’s hard to imagine a riskier strategy, even as prices hit their lowest levels in 15 months in the wake of the banking scare last month. It now appears that OPEC+ would prefer prices to be close to $90 a barrel than $80, which might be ok for them, but could make inflationary pressures for everyone else much harder to subdue. Bond yields have jumped higher because of OPEC+ weekend move.
Consequently, interest rates may well have to stay higher for longer, especially with labour markets continuing to show little sign of stress. Unemployment rates continue to remain at ultra-decade lows, along with decent vacancy rates, and wage growth has shown little sign of slowing down.
In this first week of Q2 the main focus this week will be on Friday’s US payrolls report, along with a couple of central bank rate decisions from the RBA and RBNZ.
On the data front we have the latest March manufacturing PMI numbers which are expected to paint a weak picture of economic activity in this sector of the economy Spain, Italy, France and Germany are all expected to see a modest slowdown to 50, 51, 47.7 and 44.7 respectively, with new orders a particular weak spot. In the UK, manufacturing activity is expected to improve to 48, while the latest ISM manufacturing survey in the US is expected to come in at 47.5.
Today’s European open looks set to be a mixed one with the focus expected to be on the OPEC+ surprise production cut announcement over the weekend, which could offer a lift to the likes of BP and Shell, and ergo the FTSE100, but weigh on other areas of the market.
EUR/USD – posted a bearish reversal on Friday having failed to move above the 1.0930 last week. This failure could prompt a slide back towards support at the 50-day SMA at 1.0730. A move through 1.0940 opens up the previous highs at 1.1030 area.
GBP/USD – slipped back from the 1.2425 area last week, keeping the current range intact. The main resistance sits at the 1.2445/50 area and the high this year. The failure at 1.2420 could see the pound slide back towards 1.2270, and then on to the 1.2180 area and 50-day SMA.
EUR/GBP – capped at the 50-day SMA last week with support at the 0.8770/80 area and the 100-day SMA. A break below here opens up the risk of a move towards strong trend line support at 0.8720 from the lows last August. On the upside, we have trend line resistance at the 0.8870/80 area.
USD/JPY – ran out of steam at the 133.60 area last week, before sliding back. Still has solid support back down at the recent lows at 130.00, with interim support at 132.20. Next key resistance now at 133.80, while a move below 132.00 opens up a return to the 130.00 area.