Away from the farrago that is Brexit, European equity markets managed to close higher yesterday, taking their cues from additional stimulus measures from Chinese authorities, while US markets continued their solid run with another day of gains boosted by some more decent top line numbers from US banks, with Goldman Sachs blowing away expectations on both the top and bottom line.
The FTSE100 underperformed, sliding back but this had more to do with some one-off factors on some of its larger cap components. Markets in Asia have struggled to follow through on those gains with a mixed session which is likely to translate into a lower European open this morning.
Last nights Fed Beige Book painted a fairly positive picture of the US economy, however concerns about a global slowdown have continued to linger as inflationary pressures continue to remain subdued despite slightly higher costs. The outlook was slightly downbeat with a lot of companies reporting that margins were being squeezed by higher costs, but a limited ability to pass on price rises to consumers.
The low inflation outlook is likely to be reinforced by today’s final EU CPI numbers for December which are expected to show a decline to 1.6% from 1.9% in November. Core prices are expected to remain steady at 1%, reinforcing the headache for ECB officials who remain keen on maintaining their guidance that the next move in rates is likely to be higher.
Earlier this week ECB President Mario Draghi insisted, in comments to the European parliament that Europe was merely experiencing a brief slowdown, and not the beginnings of a recession. Those comments could well come back to haunt him in the coming weeks, especially since the OECD’s composite leading indicator dropped to 99.3 in November, its lowest level since October 2012, and close to possible recession levels.
For all the chaos at the top of government the pound has retained its post vote resilience, hitting its highest level against the euro since last November, even taking into account the no-confidence vote which took place yesterday evening, which the Prime Minister was able to survive by a majority of 19.
The general feeling in the markets remains that somehow MPs will be able to come together to be able to head off the prospect of the current default position of a no deal Brexit, however that theory is still likely to be severely tested in the coming days and weeks.
While PM May was able to head off the Labour Party’s no confidence motion on this occasion, it doesn’t mean she won’t face another challenge which might succeed if members of her own party feel that their vision of Brexit is being sacrificed on the altar of a compromise.
The Prime Minister’s insistence on sticking to the core outline of her failed deal can almost be compared to trying to resurrect a corpse, nonetheless she appears to be determined to stick to some of her predetermined red lines.
For all of the available scenarios that are likely to be tested, an extension to article 50 likely to be top of the list however for that to happen the EU needs to be confident that MPs can coalesce around a deal that more than 321 of them can vote for in order to carry a majority in the House of Commons.
This still looks some way off in the short term even with the fact that there now appears to be cross party input into what the next steps might be in terms of a Plan B, after Theresa May’s statement on the steps of 10 Downing Street last night.
EURUSD – continues to look soft having fallen below the 1.1420 area earlier this week, and continues to drift lower with support coming in at the 1.1330 area, a trend line from the November lows of 1.1217.
GBPUSD – despite a brief dip earlier this week to 1.2670 the pound has managed to hold up fairly well with resistance still at the 1.2930 area, and the highs for this week. A move through 1.2930 retargets the 1.3000 area.
EURGBP – hit a six week low yesterday as the euro continues to remain under pressure, despite this week’s spike up to the 0.8970 area. Support comes in at the 0.8810 area. The overall range remains intact, with resistance also at 0.9020 and 0.9100.
USDJPY – continues to trade between the 107.50 area and resistance at 109.20. has the while below the 109.20 area. While below the 109.20 area the bias is for a move lower, towards the 106.00 area. We need to recover back through the 109.20 area to argue for a return to the 110.30 area.