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Cautious start for Europe

Asia markets got off to a slow but positive start this week, taking their cues from a decent US non-farm payrolls report on Friday, and a China Caixin services PMI reading which was slightly better-than-expected for January.

Despite these gains, markets in Europe look set for a fairly low key start in a week where attention is set to remain on a weak economic outlook after some disappointing economic numbers last week. The focus will be on the services sector and what measures the ECB has left in its locker to mitigate any further economic weakness.

The Dow completed six weeks of gains last week, after US non-farm payrolls for January came in at a surprisingly robust 304k jobs, though some of the gloss was taken off the number by a surprisingly large revision to December’s 312k, when it was revised lower to 222k. Wage growth also slipped back to a still fairly decent annualised 3.2%, however the monthly number missed expectations by coming in at 0.1%.

The strength of the January number was all the more surprising given the US government shutdown which saw hundreds of federal employees miss out on their monthly pay cheques, but this may also help explain why the January number was so strong. A jump in part-time jobs, which was particularly strong, has been attributed to a number of these laid-off Federal employees taking up part-time employment in order to offset the loss of their government income.

This means that the numbers could be susceptible to a downward revision next month, in a similar fashion to the way that the December numbers were revised lower. That is not to say that these weren’t good numbers; they are still very solid, with 100 successive months of job growth. However the lack of data visibility elsewhere in the US economy suggests that they still need to be treated with caution, at a time when inflationary pressures still look subdued.

Subdued inflationary pressure was no doubt behind last week’s sharp shift in how the US Federal Reserve sees the prospect for future rate rises, as well as balance sheet reduction this coming year. This significantly dovish shift has seen the US dollar slip back but more importantly has acted as a significant reassurance to investors that they have woken up the realisation that they may well have been on the cusp of a potential policy mistake.

It was also a good week for the FTSE 100, as it made its highest weekly close since the beginning of November last year, helped by some sharp rebounds in commodity prices, while the DAX spent most of last week chopping sideways, weighed down by concerns over the German economy, as well as merger talk surrounding Deutsche Bank.

After rising for seven weeks in a row the pound slipped back last week, after MPs voted to send the prime minister back to Brussels with the intention of reopening the withdrawal agreement in an attempt to remove or change the Irish backstop Soon after MPs voted, the EU pushed back saying that there was no scope to reopen the agreement and as such it was this deal or 'no deal'.

Nonetheless the prime minister will be heading back to Brussels this week with the sole intention of trying to wring extra concessions out of the EU, however unlikely that may be. All the while the volume of warnings around the prospect of a 'no deal' outcome continues to be ramped up, as both sides ramp up the propaganda war in an attempt to push their various agendas.

The weekend news that Nissan will no longer be manufacturing its new SUV X-Trail model at its Sunderland plant as previously promised has inevitably raised the political temperature between the various pro and anti-Brexit factions.

It is most certainly true that Brexit uncertainty will probably have contributed to the decision to change tack, however it is also true that the new car market has changed significantly since those days back in 2016. Diesel sales are in full retreat due to new emission regulations, while the recent trade deal between Japan and the EU which removed tariff barriers on all new Japanese car sales in the EU makes the need to relocate production rather moot.

At a time when margins are under pressure for all car manufacturers, the costs of committing to new capital expenditure on a model that isn’t even in the top 20 bestselling cars in Europe was always a big ask and is probably more of a reason than anything to do with Brexit.

We also have the latest construction PMI numbers for the UK economy for January. Despite the collapse of Carillion a year ago, the UK construction sector has held up fairly well, though it has been slowing in recent months, hitting a three-month low in December. Housing was a little on the weak side, while civil engineering picked up quite sharply. Optimism in this sector has remained buoyant despite the economic gloom and could well see a pick up in the January numbers.

EUR/USD – pushed up to the 1.1500 last week but needs to get 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.

GBP/USD – found a short term top last week at 1.3220 and has seen the pound slip back towards the 200-day MA at 1.3040. A move below the 1.3020 area opens up a return to the 1.2820 area.

EUR/GBP – found support at the 0.8620 area which has underpinned the euro for the last 19 months and has rebounded back towards the 0.8800 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.

USD/JPY – unable to break above the 110.20 level last week, keeping the pressure on the downside. Currently have resistance at the 109.20 level which keeps the onus on further weakness towards the 108.20 area. Above 110.20 argues for a move towards 111.00.

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