While European and US markets managed to book their fourth successive week of gains they still remain in negative territory for the year, though the FTSE100 did slip back slightly last week, largely as a result of weak performances from the mining, oil and gas and banking sectors which all posed negative weeks, and weighed overall.
This week looks set to get off to a positive start due to Asia markets following on from the positive end to last week, as we look ahead to another week of headline risk from data and central banks.
It was a better week for the European banking sector which managed to post its fourth successive weekly gain, helped in no small part by last Thursday’s ECB rate meeting which saw ECB President Mario Draghi announce further easing measures, while at the same time putting into place special measures to help European banks mitigate some of the effects of negative interest rates.
Central banks are set to remain in focus this week as well when we get announcements from the US Federal Reserve, Bank of Japan and the Bank of England.
The recent improvement in sentiment has also seen the S&P500 and Dow Jones index both push above their 200 day MA’s for the first time this year, which has also helped increase confidence about further gains in the coming days.
While this is undoubtedly a positive development it should not be viewed in isolation, particularly since both indices have traded in and around this average for most of the last year without actually going anywhere. Furthermore the average is still trending lower so an explosive move higher is probably unlikely, which suggests that investors should be cautious about unpacking the bunting for the time being.
The rebound in equity markets has also been helped by the recent rebound in the Chinese yuan which is trading at its highest levels this year against the US dollar, which has assuaged investor concerns that Chinese policymakers were about to embark on a sharp devaluation of their currency. Despite the rebound in the yuan this isn’t a concern that is going to go away particularly given the Chinese economy continues to look a little on the weak side, though there were some bright spots, from the data released at the weekend.
The release of the latest February industrial production and retail sales data showed a slowdown on the January numbers, and though part of that was down to Chinese New Year, it is still worrying given last week’s awful trade numbers.
Retail sales slowed sharply, coming in at 10.2%, down from 11.1%, well below expectations and the lowest since June last year, while industrial production was also weaker at 5.4%, down from 5.9%, and the worst start to a year since 2009.
The fall in retail sales is especially concerning given the desire to rebalance the economy, particularly since manufacturing output continues to drag. The biggest falls in manufacturing were in the car industry which saw output drop over 12%, while SOE output also fell over 2% year on year.
There was some encouragement with fixed asset investment rising 10.2%, an increase from 10%, but the fact that consumer spending appears to be slipping back, could well see Chinese authorities pull another surprise this week, and cut rates, especially if the Bank of Japan decides to lean into the prospect of further rate cuts when it meets early on Tuesday.
With the Federal Reserve set to conclude its two day meeting late Wednesday, this week is likely to give an important steer for financial markets over the next few days, with the narrative from the US central bank likely to be more important than the actual decision.
Particular attention should be paid to the Fed’s inflation and growth forecasts, in the context of when to expect the next rate rise, as well any concerns policymakers may have about the weak global outlook.
EURUSD – last week’s break above the 200 day MA at 1.1050 could well see further gains beyond the peaks just above 1.1200 last week, but we have to hold above it to do so. The next resistance is at 1.1380, the February highs. Only below 1.1030 argues for a move towards 1.0800, with a break targeting 1.0600.
GBPUSD – last week’s rebound to 1.4440 could well suggest a short term base is in for now, but in the short term we could well see a pullback towards the 1.4220 area. While we stay above this key level and last week’s low at 1.4120 we could well see further gains towards the 1.4600 area.
EURGBP – last week’s low could well mark a potential neckline support between 0.7670 and 0.7690. With resistance currently at 0.7860, a failure to break higher could trigger a fall towards that support and potentially a move to 0.7520. A move above 0.7860, could well revisit the 0.7930 area.
USDJPY – still side-lined between support at 111.00 and resistance at 114.90 we need to see a break one way or the other for clues as to the next move. The bias remains towards the downside towards 106.00 while resistance at 114.80 remains intact. Above 115.00 argues a short term base is in place.
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