European markets rolled over sharply into the end of last week, closing at three week lows, roiled by rising concerns about a more enduring global economic slowdown, as well as worries about a renewed escalation in the US, China trade war, after President Trump confirmed he had no plans to meet with China’s President Xi before the 1st March tariffs deadline.
Talks with China are set to continue this week when US Treasury Secretary Steve Mnuchin and US trade representative Robert Lighthizer travel to Beijing today for the next stage of talks.
US markets appeared less worried about last week’s turn of events, posting their highest weekly close this year, and which should see European markets start the new week slightly higher.
In a week that is once again likely to have Brexit as a dominant theme, with the probability that a second parliamentary vote on the current withdrawal agreement could well be deferred this week, the UK economy is once again set to take centre stage with the release of a raft of economic indicators. These will tell us a lot about how things were at the end of last year, but precious little as to how the economy is doing right now.
It was always inevitable that after the strength seen in the middle of last year the UK economy would soften somewhat heading into the final quarter. A lot of the strength seen in Q2 and Q3 was a consequence of a weak Q1 as a result of the so called “Beast from the East” which paralysed most of the country into March.
The resultant rebound was as much to do with that as a Royal Wedding, a long hot summer of sport, culminating in a decent Football World Cup run for England. As such a softer patch in the lead up to Christmas shouldn’t be unexpected, and it is something that we will see confirmed later this morning when we get the first iteration of Q4 GDP with most estimates expected to come in at around 0.3%, down from 0.6% in Q3. The monthly GDP number for January is likely to show the UK economy stagnated.
With the outcome with respect to Brexit continuing to get pushed into the last minute, it won’t be too surprising to see business investment for Q4 remain lacklustre with a decline of 1.3% expected.
For all the doom and gloom being predicted for the UK economy over the last few months, some of the recent data that we’ve seen from our closest neighbours and trading partners has been even worse, with Italy in recession and the risk that Germany and France may well follow suit.
Today’s industrial and manufacturing production data for December is likely to be instructive in this regard, with expectations for a rebound after some disappointing November numbers, though this may be somewhat optimistic given recent data from across the Channel, which showed significant weakness.
Manufacturing production is expected to come in at 0.2%, and industrial production 0.1%, though the annualised numbers are expected to come in worse, at -1.1% and -0.4% respectively.
While politics in the UK is fractious things are no better in Italy, France or Spain given recent events, as we head towards the European elections.
In Italy over the weekend officials in the government launched an attack on the Bank of Italy as well as the regulator, accusing them of not acting in the best interests of Italian savers.
In France, violent protests continued for the 13th weekend in a row, while in Spain the incumbent government was the subject of mass protests in central Madrid, calling for new elections, ahead of this weeks budget vote.
EURUSD – remains on course for a move towards the November lows at 1.1215. We have resistance at the 1.1400 level. We need to see a move beyond the 1.1520 area to signal a deeper move towards the December peaks at 1.1570.
GBPUSD – made a low of 1.2850 last week, however the rebound has been muted thus far. We need to see a move above the 1.3020 area to stabilise and argue for a return to the highs of January at 1.3200. A move below 1.2820 argues for a move towards 1.2700.
EURGBP – the rebound from the 0.8620 January lows ran into problems just above the 0.8800 area last week. The 200-day MA at 0.8860 area is a key resistance but we also have resistance at the 0.8820 level. Bias remains towards the downside and January lows while below 0.8850.
USDJPY – currently becalmed below the 110.20 level which continues to act as 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 argues for the 108.20 area.