It has turned out to be a fairly quiet start to the week for global stock markets so far, with Asia taking a back seat due to Chinese New Year, while European markets had a mixed session on the back of some weak earnings reports, particularly from the banking and auto sectors.
Asia markets were also mixed, with the Nikkei 225 struggling for gains, while Australian stocks surged on the back of a rebound in mining and banking stocks. The banking rally was all the more welcome after a Royal Commission into banking behaviour stopped short of calling for a breakup or wide scale reform of Australia’s banks, after a series of scandals.
US markets had an altogether more positive tone helped by the tech sector as the afterglow of Friday’s non-farm payrolls continued to support the market. Away from the resilience of US markets however, the underperformance of markets in Europe continues to act as a nagging concern that all is not as it should be.
Over the last 12 months we’ve been told that the gradual deterioration in European economic data which started in Q1 last year was only likely to be a temporary phenomenon, yet here we are a full year later and Italy is in recession, while German growth stagnated at the end of 2018.
Last week’s manufacturing PMIs showed little sign of a pickup in January, apart from a decent number from Spain, and today’s services numbers might well be similarly disappointing. We already had a sneak preview of the French and German numbers at the end of last month and the French numbers were particularly awful, disrupted to some extent by the “gilet jaunes” protests, coming in at 47.5, almost a 5-year low, and down from 49 in December, having cratered from 55.1 in November.
In Italy the services sector is expected to have stagnated in January, coming in at 50, and in the process inviting further scrutiny of the Italian governments growth expectations, which continue to look spectacularly heroic, as well as being even more unachievable as each day passes. It can only be a matter of time before the market refocuses its attention on the likelihood of the Italian government running back into conflict with the EU about its fiscal plans.
Any thoughts that the European consumer might come to the economy’s rescue were well truly torpedoed in the most recent retail sales from Germany for December, which saw a truly extraordinary monthly decline of 4.3%. This is likely to manifest itself in this morning’s EU retail sales numbers which are expected to show a decline of 1.6%.
In the UK the beleaguered auto sector is once again likely to be the centre of attention, after the shock of Nissan’s surprise announcement at the weekend to not go ahead with its plans to produce the X-Trail SUV at its Sunderland plant. This morning we’ll get to see latest new car registrations for January and they probably won’t make for pretty reading, given that we saw a 5.5% decline in December.
Yesterday the construction sector posted a rather disappointing PMI reading for January, coming in at a ten-month low of 50.6, dropping sharply from a strong end to last year. Services activity for so long a strong performer last year saw a drop off towards the end of last year and this may well have filtered over into this year as well. In December we saw activity come in at 51.2 after a weak November, and with retail activity also looking weak we shouldn’t rule out a similarly lacklustre reading.
Expectations are for a slight moderation to 51.1, while the latest retail sales numbers for January from the British Retail Consortium showed that the UK consumer remained cautious after a poor December reading of -0.7%. January retail sales showed a rise of 1.8%, a welcome respite after a series of poor months, and one of the worst December performances in recent years.
EURUSD – has continued to slip back after last weeks failed attempt at the 1.1500 level. We need to see a move beyond the 1.1520 area to signal a deeper move towards the December peaks at 1.1570. We have support back near the 1.1420 level, with a move below this level retargeting the November lows at 1.1215.
GBPUSD – has continued to slip back after last weeks failed attempt to move through the 1.3220 level. A move below the 200-day MA as well as the 1.3020 area opens up a return to the 1.2820 area.
EURGBP – currently treading water below the 0.8800 area, with the risk we could slip back towards the 0.8680 area. We need to overcome the 0.8820 area as well as the 200-day MA to unlock the prospect of a move back to the top end of the range.
USDJPY – the 110.20 level remains a key resistance. We need a break through here to retarget a move towards 111.00. A failure to move above the 110.20 level keeps the onus on fall back towards the 108.20 area. Above 110.20 argues for a move towards 111.00.
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