It looks like being a fairly mixed bag for European equity markets as we come to the end of the week, with the FTSE 100 holding up fairly well, though markets in Europe have struggled. 

Italian markets in particular are having a bad week, as bond yields pushed sharply higher on rising political concerns ahead of next month's referendum. Italian banking stocks hit five-week lows yesterday over concern about the level of non-performing loans, as well as a sclerotic economy, and the increasing prospect that Italian PM Renzi might lose the vote.

Oil prices continue to get buffeted by the ebb and flow of OPEC jawboning about the potential for a deal at the end of this month in Vienna, however a strong US dollar isn’t helping their cause as is an inability to deliver a consistent message at a time when output continues to rise on a month to month basis. Scepticism remains the over-riding emotion when looking at OPEC’s ability to make a deal stick when no-one wants to commit to a cut in output.

The US dollar index has continued its push higher to multi year highs, trading at levels last seen in April 2003, as speculation about a faster pace of rate rises and a reflationary new Trump Presidency continue to generate a strong tail wind for the greenback.

Yesterday’s economic data also helped with weekly jobless claims hitting their lowest since 1973 at 235k, while Fed chief Janet Yellen confirmed in testimony to the economic committee in Congress that given the current state of the US economy that a rate rise was in all likelihood fairly imminent, further cementing market expectations that a rate rise in December is pretty much a done deal.

She went on to say that any fiscal stimulus program from the new administration in whatever form it took would have to be taken into account when setting future policy due to the inflationary risks involved in implementing such measures.

US 10 year yields in the wake of this closed at their highest levels this year, near 2.29%, bringing the total move higher since the election last week, close to a 45 basis points move higher.

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This fiscal tightening doesn’t appear to be weighing on US stock markets quite yet, as they all finished higher and close to their all-time highs, but you have to wonder how much longer it will be before it does, and that’s before the side effects of higher US rates are likely to have on emerging market economies and their currencies.

One sector that continues to benefit from rising yields is the banking sector which has spent most of this year in the doldrums due to concerns about the toxic effects of a low and negative rate environment on their balance sheet margins.

Amidst all this US dollar strength the pound has held up fairly well as a week of economic good news culminated in a strong performance in October as retail sales growth surged after a pretty flat performance in August and September.

Annualised retail sales jumped 7.4% the biggest rise since April 2002 as consumers shelled out on clothing and Halloween items, while on-line retailers saw their biggest rise since 2011.

With most retailers enjoying a decent month several reasons have been posited for the big jump including overseas shoppers enjoying a spending bonanza. There could also be a much simpler reason given recent headlines about imminent big price rises.

It could be canny shoppers getting ahead of potential price rises in the lead-up to Christmas given all the lurid headlines about sharp prices in the pipeline after Marmitegate and all the nonsense surrounding the triangles in Toblerone, as if suppliers have never shrunk the size of their chocolate bars before.  With Black Friday and Cyber Monday coming up next week its quite likely we could well see a decent performance in November as well, particularly given that wages are still just about outpacing inflation.

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EURUSD – the euro has slid below the 1.0700 level, opening up the prospect of a move towards the 1.0460 level and last year’s low. To confirm a break of trend line support from the all-time lows at 0.8200, we need to see a sustained break below 1.0600. We would need to see a recovery back through 1.0830 and then the 1.0950 area to stabilise.

GBPUSD – the pound is currently struggling to move much beyond the 1.2500 level but while it finds support above the 1.2380 area the prospect of a move back towards 1.2670 remains on the table. The prospect of further gains towards 1.2880 remains a possibility, while above these lows. Only a move through 1.2330 opens up the potential to revisit the recent lows near the 1.2100 area.

EURGBP – the decline through the 0.8780 area continues to exert downward pressure on the euro having taken out the low last week at 0.8565 with the potential to extend even further towards 0.8380 in the short term. For this to unfold the euro needs to stay below the 0.8780 area in the short term.

USDJPY – we’ve seen the US dollar move towards the 110.00 area, and the 38.2% retracement of the 125.85/99.55 down move. A break of 110.00 could well see a move towards 112.70.

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