It’s been a bit of a strange week for European equity markets with more record highs for the FTSE 100 and FTSE 250, while the rest of Europe has struggled to make any progress at all, despite significant improvements in the macro economic outlook.
The rise in oil prices that we’d seen this month in the lead up to this week’s OPEC meeting came to an abrupt and shuddering halt yesterday in the wake of the expected announcement that members, as well as non OPEC members, had agreed to extend the cuts agreed in November last year for another 9 months, until March 2018.
The resultant market sell-off shouldn’t really have been too much of a surprise given that having delivered on expectations, markets didn’t really have anywhere else to go.
If anything the fact that OPEC was only able to deliver on expectations served only to highlight how much of a hostage to fortune they are to not only US shale producers, but also to those members who aren’t included in the output cap, namely Nigeria and Libya whose output when at full capacity makes up 6.7% of OPEC output.
Even Iraq, whose output is 13.8% initially pushed back against the cuts extension, went along with it eventually, however they have consistently exceeded their daily limit every month of this year as they look to generate enough cash to fund their fight against Islamic State.
Is it any wonder therefore that inventories have remained at elevated levels and have struggled to come down? For oil prices to continue their recent rally OPEC leaders needed to over deliver, with the prospect of deeper cuts and they failed to do that.
US markets shrugged off the sharp declines in crude oil prices with the tech sector once again leading the gainers and pushing the S&P500 and Nasdaq to new record highs once again, as the S&P500 finally managed to maintain a foothold above the 2,400 level.
The main drivers of this rally have been Facebook, Apple, Amazon, Netflix and Google with double digit percentage gains across the board so far this year, and no evidence thus far that momentum appears to be waning.
With volatility near multi year lows that should already give cause for concern, particularly since there does appear to be some evidence that the US economy might be stuttering a little.
What is more worrying is that equity investors appear to be ambivalent about this, confident that the slowdown seen in Q1 is no more than transitory, however recent economic data would appear to cast doubt on that.
This week’s economic data hasn’t exactly been great, though it is still likely to pass down in the form of an improvement in the Q2 numbers for GDP, however there remains little, if any evidence of inflationary pressure building up in the economy.
Today’s latest US Q1 GDP revision is expected to show a slight improvement from the unexpectedly weak 0.7% reading a few weeks ago, however it is still only expected to nudge up to 0.9%, and even that might be a stretch, due to weak consumer spending.
Durable goods have also been a bit of a weak spot in recent months with no growth at all in Q1, which means we may see a pick-up in April of about 0.4%.
The pound has also had a difficult week, and has slid further overnight, weighed down by a narrowing in the polls in favour of Labour, weaker than expected economic data and a stronger euro.
The G7 summit in Sicily is also set to get under way today with the subjects of trade protectionism, climate change, Russia and the migration crisis all likely to be up for discussion.
EURUSD – the key day reversal seen earlier this week, after the failure at the 1.1270 area continues to keep a cap on the euro and could well prompt a drift back down to the 1.1020 area in the short term. There remains significant resistance at the November highs around the 1.1300 area.
GBPUSD – the pound is starting to look a little soft as it continues to struggle move beyond the 1.3040 area, having failed a number of times to break above it. As such we remain vulnerable to the risk of a pullback towards the 1.2840 area. A consolidated move through 1.3050 has the potential to target the 1.3320 area. Only a move below 1.2750 argues potentially back towards the 1.2600 area.
EURGBP – the euro looks set to push up towards 0.8720 as well as trend line resistance at 0.8700 from the highs back in January this year. The 200 day MA near the 0.8600 level remains a key support on the downside. A break below the 0.8600 area could well open a return to the 0.8540 area and the 50 day MA.
USDJPY – the 112.40 area remains the next key resistance level, which a failure to overcome could prompt a return to the 110.20 area, and last week’s low. Above the 112.40 area could well see a move back towards 114.00.
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