European and US stocks finished lower last week as traders were worried about the rally in US government bond yields, which hit fresh seven-year highs. 

The fear surrounding emerging market economies has been hanging over the markets for several weeks, and the spike higher in US yields cranked up the fear factor. Higher US yields could spell higher borrowing costs for emerging economies like Turkey, India and Brazil, and these economies are struggling already. A presidential election is underway in Brazil, and volatility in the Brazilian financial markets is likely to be increased.   

Overnight, the Caixin survey of Chinese services was released and the reading was 53.1, in comparison to economists’ predictions of 51.4. The previous report was 51.5. It is encouraging to see that the services sector grew at a faster pace, as it suggests the Chinese economy is coping well in the face of trade tensions with the US. On the other hand, the Chinese central bank are a little nervous about the trade spat with the US, as they cut the reserve requirement ratio for the fourth time this year, and that prompted selling of Asian stocks as it sent out a weak message.    

Last week we heard from Jerome Powell, the head of the Federal Reserve, who suggested US rates were still some way from the neutral rate, and traders took that as a sign that further monetary tightening is in the pipeline. Friday’s US non-farm payrolls update was mixed, but there were enough positive aspects in it to ramp up the prospect of additional rate hikes from the US central bank.

The September report showed that 134,000 jobs were added, but the August report was revised higher to 270,000 from 201,000. The unemployment rate fell to 3.7% - its lowest level since 1969 - while average earnings fell back to 2.8% from 2.9%. The impact of Hurricane Florence was cited as the reason for the poor headline number, so we could see a positive revision next month.

Over the weekend, we heard from Luigi Di Maio, Italy’s joint deputy prime minister, who said the government intends to stick to its plans to increase the budget deficit, against the wishes of Brussels. Mr Di Maio believes the EU will soften its stance on nations breaking their budget deficit targets. Any clash between Rome and Brussels could rock the Italian government bonds and stocks, and possibly the euro too.  

At 7am (UK time) Germany will release the latest industrial production figures, and the consensus estimate is for an increase of 0.5%, which would be an improvement on the 1.1% decline in the previous reading. Throughout 2018, the report has seen more contractions than increases, and broadly speaking the economic indicators out of Germany recently have been mediocre.   

Sterling will remain in focus as uncertainty over Brexit continues, Theresa May appealed to middle-of-the-road voters over the weekend asking them to support her proposals for exiting the EU. The newspaper article was aimed at winning over centrist types and ‘new Labour’ MPs. The dollar’s recent return to dominance has hurt the pound, and politics is a major player in sterling’s movements.   

EUR/USD – has been diving lower since late September and if it breaks below the 1.1510/00 region it could pave the way for the 1.1300 region to be retested. A move to the upside could run into resistance at 1.1635 – the 100-day moving average.

GBP/USD – has broadly been pushing higher since mid-August and if the positive move continues it could target the 1.3300 region. A break below 1.3000 could put 1.2895 on the radar.

EUR/GBP – the key week and day reversal that we saw in late August could point to further losses and support might come into play at 0.8725. A bounce back could run into resistance at 0.8839 or 0.8900.

USD/JPY – the upward trend that began in March is still intact, and if the positive move continues it might target 114.73. Support might be found in the 113.57/18 region.
 

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