The positive start to 2020 continued last week with new record highs, not only for US markets, but European markets as well, with the Stoxx 600 also setting a new record peak, while the German DAX, is only just shy of its own record high, previously set back almost back two years ago this week, near 13,600.
The feel-good factor appears to be being driven by a number of factors including better than expected economic data, as well as the dialling back of trade tensions between the US and China as the low hanging fruit of a phase one trade deal was being signed off.
If you also toss into the mix some better than expected earnings reports from US banks and other multinationals, and it makes a heady cocktail of optimism on which to push stock markets higher.
That’s not to say there still isn’t an element of a wall of worry, with the resilience of the gold price speaking to a market that doesn’t necessarily want to put all of its eggs into one basket.
In spite of this, last week’s economic data out of China, ahead of the start of Chinese New Year at the end of this week, has raised expectations that the Chinese economy has turned around after the slowdown in economic data at the back end of 2019.
With central banks also seemingly content to keep monetary policy on the easy side, there is a feeling that despite some expensive valuations, on the balance of probabilities stocks are still the best place to be.
This week’s central bank meetings from the Bank of Japan, Bank of Canada and European Central Bank are set to reinforce this dovish narrative, with the latest manufacturing and services flash PMI’s for January from Germany and France are expected to build on the rebound in economic activity seen towards the end of last year.
The pound has come under pressure in the past few days on speculation that the Bank of England may well cut interest rates at the end of this month. Last week’s disappointing retail sales numbers for December, showed that consumers remained in defensive mood, despite the removal of three years of political uncertainty with the election of a Conservative majority government.
The decline in retail sales for the second month in a row, along with other disappointing economic reports this month, appears to be tipping market expectations ever increasingly towards a cut of 25bps, currently at an over 70% probability.
This week’s flash PMI’s could well go further towards raising that percentage further, however more cautious voices have pointed to the fact that a lot of the reason for the slowdown at the end of last year was down to rising political uncertainty, and the prospect of further political gridlock, along with the slight possibility of the election of a minority Labour government.
If this week’s flash PMI’s for January point to a New Year rebound in economic activity in the manufacturing and services sectors, the pound could well be susceptible to a sharp rebound.
Oil prices are in focus again after two weeks of losses as unrest in Libya and a shutdown in Iraq caused disruption to supplies A military blockade in Libya, which has shutdown most of its production output has seen prices rebound to a one week high.
Friday’s positive finish for US markets looks set to spill over into a positive open for markets in Europe today, however activity could well be subdued due to the US being closed for Martin Luther King day.
EURUSD – the failure to consolidate a move above the 1.1170 last week saw the euro slip back, falling towards the 50-day MA, with a break below targeting a move towards the 1.1040 area initially, where we have trend line support from the lows last year at 1.0878.
GBPUSD – we could well see further weakness in the days ahead after last week’s failure above the 1.3120 area. We now have trend line support which comes in at 1.2960 from the November lows of 1.2765. A move through 1.2950 opens up the 1.2870 area.
EURGBP – last week’s failure at the 0.8600 level prompted a pullback to the 0.8470 area. We need a break either side of this range to signal the next move. A move above 0.8600 targets the 0 8790 area.
USDJPY – while above the 109.70 area the risk of further gains towards 110.70 remain on the table. Below 109.70 opens up support at 109.20 as well as last week’s lows at 107.65.