After two days of declines markets in Europe underwent a modest rebound yesterday as the enormous waves generated by last week’s events in the Middle East continued to subside, despite reports that Iran was considering 13 different scenarios in which to retaliate to the US over the killing of Iranian General Qassem Soleimani.
This optimism over a de-escalation proved to be somewhat short-lived after 15 missiles were fired at US-Iraqi bases from Iranian territory with the Iranian Revolutionary Guard claiming responsibility. With casualty levels still not known the big question is whether President Trump follows through on his promise to hit back at Iran if they did retaliate.
Oil prices also slipped back from their recent peaks yesterday, before spiking sharply again this morning keeping tensions high in the process, with markets still seemingly content to play it by ear so to speak in order to establish how this start of what looks like tit for tat plays out.
While this might seem complacent in terms of some overall valuations it’s not immediately clear what else investors can do apart from hedging their stock market exposure, by moving money into gold, as well as other havens, like US treasuries, as well as the Japanese yen and Swiss franc. For now, gold has been the key beneficiary and is likely to remain so, while a bigger move into US treasuries will only follow if tensions start to rise further, which now seems likely.
Against this backdrop of uncertainty and with US equities already close to their recent all-time highs, having rebounded strongly on Monday, it is not too surprising that they found further gains a little more difficult to sustain yesterday, closing slightly lower on the day. If stocks are going to push on towards new record highs, we’ll probably need to see a little more time pass, and the dust to settle further, before the market feels confident enough to release the shackles a little more, which judging by this morning events doesn’t look that likely in the short term.
As a result of last night’s weaker finish in the US and this morning’s Iranian missile strikes markets here in Europe look set for a similarly negative start.
With improvements in services PMI’s for December a welcome development at the end of last year, attention is set to shift towards the health of the US labour market later today, as well as the end of this week, starting with the December ADP payrolls report this afternoon.
Last weeks Fed minutes showed that US policymakers appeared happy with the direction of the US economy, with some expressing confidence that further strengthening of labour market conditions was possible in the coming months, without putting too much upward pressure on headline inflation.
There was also an expectation that the overall participation rate had the potential to go higher, though it should also be noted that the November ADP report did surprise with a particularly weak number of 67k, the second lowest number in 2019. Today’s December report is expected to see a rebound to 160k jobs however this also needs to be set against a manufacturing sector that is mired in recession, and where the ISM manufacturing index hit a ten-year low last week, and where the employment index also contracted.
It would appear that like Europe last year manufacturing is struggling, while the services sector is picking up the slack. It also helps explain why wage growth is so tepid given that services jobs tend to be lower paid relative to highly skilled manufacturing jobs.
The latest US ISM non-manufacturing report for December appears to bear this narrative out, coming in at 55, beating expectations of 54.5, with the employment component only softening modestly to 55.2, from 55.5 in November.
EURUSD – finding support above the 200-day MA at 1.1130 the bias has shifted towards further gains towards the highs last week at 1.1240. Currently in a minor uptrend from the October lows but needs to take out the 1.1250 area to signal further gains towards 1.1400. If we fall below 1.1100 then we could drift back towards the 1.1040 area.
GBPUSD – still in the uptrend from the lows in September, despite failing to push above 1.3220 yesterday. The fall from the 1.3500 highs last month found support at the 1.2920 area, and would need a break of this and 50-day MA to signal further declines. We need to move above 1.3220 to target 1.3500
EURGBP – support held at the 0.8450/70 area yesterday, and while above here the risk is for a move back to the highs last month and 0.8600 resistance. Above 0.8600 targets the 0.8800 area.
USDJPY – currently have some support at the 107.70/80 area, a break of which could see a fall to the 106.80 level. While support just below 108.00 holds the risk is for a return to the 109.20/30 area.