Equity markets continued to play out their games of snakes and ladders yesterday, this time posting strong gains, led higher by financials and technology stocks, while oil prices shrugged off some early losses to post another day of gains with US oil prices moving to a par with Brent prices for the first time since mid-January.

The rally in oil prices was driven by a big draw of 5m barrels, well over expectations when the latest API data was released last night.

Amongst one of the main catalysts for yesterday’s rebound was a sharp rise in US new home sales for April which saw a gain of 16.6%, and their best levels since January 2008, suggesting that the US housing market is looking fairly resilient, though whether that would remain the case if the Federal Reserve were to embark on a rate hiking cycle, is open to question.

This jump in new home sales came about at the time of a fairly low backdrop of expectations about when the Fed was looking to push rates up. Since then rate expectations have jumped quite sharply to 36% for June and nearly 54% for July.

While the jump in US housing data was encouraging and certainly helped banking stocks who would most likely benefit from slightly higher rates in terms of their margins, the health of the US manufacturing sector continues to give cause for concern, as the Richmond Fed manufacturing index for May dropped sharply from 14 to -1 carrying on from the weak Philadelphia, Empire and US Markit manufacturing numbers seen in the past week or so.

Today’s Markit Services PMI for May could well further reinforce the perception of a two speed US economy, doing well on the services side but struggling on the manufacturing side. A reading of 53 is expected, up from 52.8 in April.

A two speed US economy will certainly present problems for Fed officials given their recent hawkishness, and rising expectations of a move in rates as early as next month.

A slightly weaker euro helped push European equities higher yesterday with the DAX pushing back above the 10,000 level again, despite a rather disappointing German ZEW sentiment survey for May.

Earlier this week we did manage to see a pickup in the latest manufacturing and services PMI’s for Germany and the hope is that will translate into a decent IFO business survey later today. It is expected to show a slight improvement to 106.8 from 106.6 in April.

Also in Europe the latest talks between Greece and creditors continued to move at their normal glacial pace, but there does appear to have been some progress, though as with anything in Europe the outline of details has been left rather vague.

The deal allows the release of €10.7bn in loans to get Greece past a couple of repayment amounts this summer, with €7.5bn falling due next month, and into the autumn. It is the subject of debt relief that remains a hotly contentious topic, something the IMF is absolutely insistent on, and the full detail of this appears to have been deferred until 2018, though it does remain dependent on Greece completing a number of prior actions. It also gets EU leaders past having to deal with the subject prior to the French and German elections that fall due in 2017. The deal still needs to be signed off by all 19 Eurozone countries.

The IMF have suggested that Greece’s primary surplus targets are way too ambitious and should be limited to 1.5% of GDP, well below the 3.5% expected by 2018, and thereafter and as such these need to be looked at, and by delaying further discussion of these until a later date does appear to be a concession on the funds part. 

EURUSD – currently struggling to overcome the 1.1250 area which means we remain at risk of a move down towards the 200 day MA at 1.1100 as well as the trend line support at 1.1040 from the December lows. We need to see a move back through 1.1250 to stabilise, and point the way to a return to the 1.1400 area.

GBPUSD – currently well supported on dips but needs to overcome this month’s high just above 1.4700 to kick on towards 1.5000. As long as we stay above the recent lows at 1.4330 the uptrend looks set to remain intact.

EURGBP – the failure to push back through the 0.7785 level and the100 day MA, has prompted a sharp sell-off and as such we look set to test towards the 0.7500 area, having broken below the 0.7680 level.

USDJPY – while we remain below the recent highs at 110.50 level the US dollar remains vulnerable to a return to the 106.00 level. A slide below 108.70 opens up the downside once more, while we would need a break above 110.50 to suggest a move back to 113.00

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