Equity markets underwent a bit of a turnaround yesterday on reports that, despite the heating up of rhetoric over politics and trade in the first part of this week, the US and China are moving closer to agreeing a deal on the number of tariffs that would be rolled back in any phase one trade deal.
While sceptical, given President Trump’s comments earlier in the week the rebound, while fairly modest, suggests that there is enough doubt there to compel investors not to get too pessimistic about a positive outcome quite yet.
Ultimately, we’ll only know what the true state of play is as we get closer to 15th December and the decision on the implementation of tariffs on the remaining $150bn of Chinese goods.
We also got some fairly mixed data from the US economy as the November ISM non-manufacturing report, while missing slightly on the headline rate at 53.9, came in much better than expected on employment, prices paid and new orders, offsetting some of the concerns about the weakness in the manufacturing numbers earlier this week.
The ADP payrolls report was slightly disappointing, and if replicated in tomorrow’s jobs numbers could prompt speculation about the prospect of the Fed being a little more dovish at next week's central bank rate meeting.
With markets in Asia playing catch up and moving higher, today’s European market open is expected to be a flat one as markets try and makes sense of the latest developments. For now we can focus on the latest German factory orders data for October which are due out, as well as the latest EU Q3 GDP numbers and November retail sales.
The German economy has been sitting in the doldrums for two quarters now, with manufacturing in particular looking fragile. In September we saw a decent end to the quarter with a rise of 1.3% in factory orders. Some of this momentum is expected to have carried over into October with a 0.4% gain, though this could well tail off as Q4 gets underway.
The final revised EU Q3 GDP is expected to be confirmed at 0.4%, and 1.2% year on year, however it is becoming apparent that consumers are holding back with a decline in retail sales for October of 0.4%, after a weak end to September of a 0.1% gain.
The recovery in Europe has continued to look a little on the weak side, with Italy still a worry.
Oil prices jumped sharply yesterday after US inventories showed a bigger drop than expected, pushing prices back close to recent range highs. With concerns about the global economy still front and centre and OPEC getting underway today, the recent rise in prices presents the cartel with a bit of a problem.
Iraq had been calling for further production cuts earlier this week in an attempt to underpin prices, however they suddenly changed their tune saying that further cuts weren’t their idea. In any case any further cuts now would run the risk of cutting the legs off what might be the flickering of a recovery in economic activity. In a sign that there are splits within OPEC Saudi Arabia has already indicated its not prepared to consider further cuts in output, and Russia looks like it might agree with that assessment.
The pound broke to the upside yesterday, as President Trump came and went while managing to avoid courting controversy over the NHS, and by virtue of that putting Boris Johnson in a difficult spot.
As a result of that currency markets appear to be starting to price out the prospect that Labour might win a majority at next week’s election. Having been so negative on the pound for so long, markets are starting to believe in the prospect that we could well start to see the prospect of an orderly withdrawal from the EU in the next two months, and thus short positions are starting to get squeezed out, sending the currency to its best levels against the euro since before the 2017 election.
Of course, it doesn’t change the fact that we then have the prospect of a short transition before the potential of a no deal Brexit at the end of 2020, but that is far enough away at the moment so as not to matter for now.
Spot currency markets deal with the now, and what might happen in the next few days, and not in what happens a year from now. A lot can change in that time.
There is, of course the potential for many more twists and turns between now and polling day, and a day is a long time in politics, let alone a week, and the polls haven’t always been accurate. Furthermore, any decent trader will tell you it is never over until the fat lady sings, but for the here and now, she does appear to be starting to clear her throat, and markets are starting to reflect that.
EURUSD – did edge up beyond the 1.1100 area, touching 1.1116 before sliding back. There is still big resistance behind that at the 1.1180 area and 200-day MA. Still has solid support at the lows last week at 1.0980.
GBPUSD – the break of 1.3020 opens up the prospect of a move towards 1.3200. Pullbacks should now find support at the 1.3020 area with a break below reopening the 1.2760 level. The 200-week MA at 1.3070 is also a big level with a weekly close targeting a wider move towards 1.3500.
EURGBP – slid below the 0.8470 area yesterday, and now opens up a potential retest of the 0.8350 area. We could still see a short squeeze back to the 0.8570 area, but the bias continues to shift to further losses in the coming weeks.
USDJPY – currently finding support at the 50-day MA at 108.45, with a break targeting the 107.80 area. We still have solid resistance up near the 110.00 area, as well as trend line resistance from the 2018 highs at 114.75.
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