European markets had a mixed session yesterday, with the FTSE100 slipping back due to a slide in oil prices, while the German and French benchmarks came within touching distance of their pre Brexit peaks.
Italian markets continued to be driven by concerns surrounding the health of the Italian banks ahead of stress test results due at the end of this week, with Monte Dei Paschi once again getting clobbered.
A slide in oil prices to three month lows saw US stock markets slide back from their record highs yesterday, and with the US dollar index hitting its highest levels since March, there seems to be an expectation that perhaps this week’s Federal Reserve rate meeting could well come across as slightly more hawkish than markets were pricing a week ago.
While the odds of an autumn rate rise still remain quite slim the fact remains that the percentage odds of a move on rates in the months from September until the year end haven’t shifted that much since the 13th June. Given recent data this would appear to suggest that the balance of probabilities for a move by the end of the year has shifted somewhat towards the upside, and that markets could be becoming complacent about it.
This may help explain the slow rise of the US dollar not only against its main counterparts but also against commodity prices, with gold prices hitting their lowest levels this month in the last few days, while oil prices have sunk to levels last seen in March.
While some of this oil price decline can be attributed to recent US dollar strength there is also a growing concern that the supply glut that many had expected to start to see markets making inroads to over the summer, might well last that little bit longer, given that gasoline stocks remain stuck at record levels, despite US driving season being in full swing.
US rig counts have started to rise again after finding a base of 404 at the end of May they rose to 462 at the end of last week.
As such the risk of a hawkish surprise tomorrow appears to be helping put a short term top on both US equity markets, as well as on commodity prices for the moment, and ahead of Friday’s Bank of Japan meeting.
The big risk here is that markets are over estimating the ability of the Japanese central bank to deliver anything of note, given recent comments from central bankers about their growing unease about lower rates and their effectiveness, amidst rising concerns about the damage being inflicted on bank balance sheets.
EURUSD – still finding it difficult to rally with the bias remaining towards a move towards the March lows at 1.0825. To stabilise we need to see a move back above the 1.1250 area.
GBPUSD – while above the 1.3050 area the risk remains for a move back through the 1.3300 area and up towards the range highs near 1.3500. Last week’s push above 1.3300 while not sustained does shift the current bias slightly higher, though a move below 1.3000 would negate, and argue for a return towards 1.2800.
EURGBP – having peaked just above the 0.8600 area earlier this month the euro has struggled for any sort of direction. With support at 0.8260 and resistance just above the 0.8400 area, the risk is for a move below 0.8250 towards the 0.8100 area.
USDJPY – the US dollar has pulled back sharply from the 107.50 area posting a key day reversal in the process. This suggests we could see further losses back towards the 103.50 area, on a break below 105.20 and the lows this week.
Equity market calls
FTSE100 is expected to open 10 points higher at 6,720
DAX is expected to open 15 points lower at 10,183
CAC40 is expected to open 8 points lower at 4,380