While January was a negative month for equity markets it was undoubtedly a month of two halves, particularly for the FTSE100 which saw a particularly strong rebound on the back of a recovery in commodity prices, as Brent crude rebounded over 25% from its lows.
Some of the recovery was also helped by a surprise cut in interest rates by the Bank of Japan into negative territory, putting it into the company of the European Central Bank and the Swiss National Bank, whose headline rates are also in negative territory, in an attempt to stimulate prices in a world of falling commodity prices, and slowing economic growth.
The biggest concern now is likely to be the likely reaction of Chinese policymakers given recent market reaction to some of their policy responses, given that not everyone can have a weaker currency.
At the beginning of last month Chinese authorities allowed the yuan to weaken sharply across the board, which in turn helped trigger the turmoil that we saw for most of the past few weeks.
This raised concerns that the Chinese economy might be in worse shape than Chinese authorities were letting on. Since then the yuan has seen most of those losses disappear, and while the most recent Chinese economic data hasn’t been particularly disappointing the fact remains that Chinese authorities are likely to push back against both the ECB and the Bank of Japan, given that over the last two years the yuan has appreciated over 13% against the euro and 8% against the Japanese yen.
As we start February the focus is likely to remain on concerns about a potential slowing down in the latest economic data, given the recent dovish noises coming out of not only the usual suspects of the ECB and the BOJ but also by the latest rather cautious assessment of the US economy as highlighted by the latest Fed statement.
We start with the latest manufacturing PMI numbers from China, Europe, the UK and the US in what is likely to set us up for either a continuation of last week’s strong rebound or a return to the widespread concern that the recent falls in stock market are symptomatic of wider concerns about economic stability.
First out of the blocks this morning has been the latest Chinese manufacturing PMI numbers, however these have been disappointing for quite some time, and they have proved to be so again, with the official measure coming in short at 49.4, and the Caixin improving slightly to 48.4 from 48.1.
It is the services sector where the markets have been focussing and while last month we saw the official non-manufacturing PMI numbers hit their highest levels since September 2014, this was in contrast to a poor Caixin services number a few days later. Last month saw a slight decline from 54.4 to 53.5.
We also have the latest Spanish, Italian, French and German January manufacturing numbers, and here we have been some softening of data in recent weeks, as economic activity has dropped off.
It’s been the same story in the UK as well with the latest January manufacturing PMI expected to come in at 51.8, down from 51.9.
Even in the US the manufacturing sector has seen a significant drop off in economic activity, and despite last month’s surprising v-shaped recovery in the latest Chicago PMI, this afternoon’s release of the latest January ISM manufacturing numbers is expected to remain in contraction territory at 48.6, just up from 48.2 in December.
More worrying has been the reluctance of US consumers to go out and spend the gasoline premium offered to them by lower fuel prices as shown by weak retail sales and durable goods numbers for 2015.
The latest personal income and spending data for December is expected to reinforce this reluctance to spend and are expected to come in lower than November at 0.2% and 0.1% respectively.
Last weeks Fed statement also saw the omission of a line about policymakers being reasonably confident that inflation will rise to 2% in the medium term, due to the sharp declines seen in oil prices in the last few weeks.
The PCE inflation numbers, which is the Fed’s preferred inflation targeting measure, while not necessarily susceptible to these types of moves in energy prices have started to track lower, and if today’s number drops back from last month’s 1 3%, then it will become increasingly difficult for Fed officials to argue with any degree of credibility that we can expect to see anywhere near three of four rate rises this year, which Stanley Fischer deputy Fed chief argued was “in the ball park” early last month. He can probably expect a few questions on that later today when he gives a speech in New York.
EURUSD – last week’s failure to crack the 1.1000 area where we have the 100 and 200 day MA’s puts the pressure back on the downside. Key support remains between 1.0775 and 1.0800, with a break retargeting the 1.0600 area.
GBPUSD – having closed at its lowest monthly level for 14 years the pound remains under pressure. We need to hold above the 1.4220/30 area or run the risk of a move towards the recent lows at 1.4085. We need a recovery back above 1.4400 to stabilise and diminish the risk of a move towards 1.3800.
EURGBP – currently trading either side of the 0.7600 area with resistance at 0.7700 and support down near the 0.7480 area. As long as we hold above 0.7480 the risk remains for a return to the 200 week MA at the 0.7900 level.
USDJPY – last week’s break above 120.00 saw a sharp move towards the 200 day MA which has so far held. A move back through 121.60 has the potential to retargets a move back towards 123.00.
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