Geopolitical risk aside equity markets managed to put in a good performance last week, closing modestly higher, in both the US and Europe, in spite of negative sessions on Friday.
There wasn’t that much to cheer on the macro side with US, China tensions still front of mind, and tensions between Iran and the US also ramping up, after the attacks on two oil tankers. Despite this there does appear to be a growing belief that for all of the growing concern about a global economic slowdown, that central banks will step up to the plate and ease policy, in the coming months.
This belief appears to be being largely reflected in bond markets, with the German bund yield even deeper in negative territory, at -0.25%, a record low, while US 10-year treasury yields have fallen back over 100 basis points in the space of six months, from 3.15% as recently as mid-November to 2.08% at the end of last week.
Investors are growing increasingly convinced that the US Federal Reserve, may well cut interest rates up to three times this year, though judging by the rally in the US dollar in the last few days foreign exchange markets have a different view. This dovish bond market view seems hard to square with what is happening on the data front, after some strong US retail sales data from April and May showed that the US consumer had started to spend again.
With all Fed members in pre-meeting purdah ahead of this week’s FOMC meeting, there hasn’t been an opportunity for any Fed officials to disabuse this growing expectation, which means that there is a real risk that this week’s meeting could puncture a lot of this rising optimism around multiple rate cuts.
It would be quite extraordinary if Federal Reserve were to perform such a significant U-turn on policy. Since the change of emphasis earlier this year, Fed officials have consistently said they are data dependant and would be patient when it comes to moving on rates. There really would be no reason to shift on this, based on the current and most recent data.
While the Federal Reserve rate meeting is probably the main event this week, at least as far as central banks are concerned, we also have the latest meetings from the Bank of Japan, as well as the Bank of England. No changes are expected from either of the meetings, though as far as the Bank of England are concerned it will be interesting to see if other MPC members echo recent comments from chief economist Andrew Haldane, as well as external member of the MPC Michael Saunders warning about the prospect for higher rates.
On the companies’ front, Deutsche Bank's share price, already near record lows, is likely to be in focus this morning after reports over the weekend that it is setting itself up for another big overhaul of its trading operations. It also plans to set up another bad bank, this one is expected to house up to €50bn of non-performing assets. It is expected that there are likely to be further reductions in head count, especially in its operations outside of Europe.
It is also reported that there could be a much greater focus on private wealth, and transaction banking, however their biggest problem is that other European banks have already gone down this road and have a head start, UBS and Credit Suisse being a case in point.
There is no question that Deutsche Bank management need to take action, the problem is they are already well been behind the curve when it comes to restructuring the business, which means that this restructuring could well have been left too late.
EURUSD – further weakness last week has seen the euro slide below 1.1260, and opening up the prospect of a return to the May lows down near 1.1110. We need to see a rebound back above the 1.1270 area to stabilise and retarget the 200-day MA at 1. 1370.
GBPUSD – another disappointing week for the pound as it heads towards the 1.2550 area and the lows this month. A move through 1.2550 argues for a move back towards the low this year at 1.2430. The 1.2760/70 area remains the primary resistance level, and the main obstacle to further gains.
EURGBP – last week’s tweezer top at 0.8930 is containing the upside for now. A move above 0.8930 has the potential to target the 0.9000 area. For now, we’re finding support at the 0.8870 area, with the 200-day MA at 0.8780 below that the main support, and is likely to contain any dips.
USDJPY – has drifted back from the highs at 108.70/80, and could drift back to the 107.70/80 area. The main resistance lies all the way back towards the 109.30 area. Bias remains to the downside and the 106.00 area, while below the 109.20 area.