Yesterday saw a rather mixed session for European markets with the FTSE100 slipping lower on the back of a sharp decline in basic resource stocks, as commodity prices slid sharply.
Broader European markets fared somewhat better helped by a better than expected German factory orders number for March, which showed a rise of 1.9% and helped boost sentiment. The rise was helped by a decent expansion for German goods outside Europe, and may help in some way also help to reflect the improvement seen in China’s economic data in March. Assuming there is a correlation between the two, last weekend’s Chinese trade and PMI data could well indicate that this March rebound is only temporary.
China’s latest inflation data showed prices were broadly steady in April relative to March with CPI coming in at 2.3% and factory gate prices declining 3.4%.
The slide in commodity prices hasn’t been helped by the recovery in the US dollar over the last five days from its recent lows, despite Friday’s weak payrolls number, gaining ground not only on its trade weighted index but also against gold, oil, iron ore and copper prices which have all declined sharply.
The weakness in commodity prices has accelerated this week after data showed that iron ore stockpiles hit their highest levels in a year. Since levels of $40 a ton in January iron ore prices hit $70 last month as a combination of stimulus measures, improving demand and a weakening US dollar helped pull prices sharply higher. This effect is now starting to fade and prices have slid back sharply in the last few days.
Oil prices also came under late pressure as concerns about the impact of the Alberta wild fires were put to one side. While the prospects for the Canadian economy are likely to be negative in the short term, in the overall scheme of things in an already oversupplied market the loss of some Canadian output is likely to have a fairly limited effect.
Despite the declines seen in the last few days reports that Iran might be prepared to discuss curbing production levels might help limit the downside in the short term.
This continued oscillation in commodity prices as well as concern about the overall health of the global economy continues to keep European markets stuck in the ranges they have been in for the last few weeks with still no clearer indication of a directional bias one way or the other.
While investors remain even more unconvinced that the US Federal Reserve will raise rates next month, US policymakers continue to peddle the line that a move remains a possibility, despite concerns about weak productivity, which were reinforced by last week’s Q1 GDP data.
On the data front the latest German industrial production data for March is expected to show an improvement on the 0.5% decline seen in February, while French industrial production is also expected to improve as well.
In the UK the trade balance for March is expected to narrow to -£4.2bn from -£4.8bn in February, as concerns about next month’s referendum continue to dominate the narrative after like for like retail sales in April showed another decline of 0.9% despite expectations of a rise of 0.5% after the 0.7% decline seen in March. The colder than expected weather seen in April is being blamed for the slowdown in clothing and footwear which was disappointing, though the numbers are likely to be seized upon as evidence that consumers are delaying their spending plans until after the referendum is out of the way, given all the nonsense being peddled by both sides of the consequences of a vote either way. On the face it the “remain” camp appear to be winning that particular race.
EURUSD – the euro has remained under pressure after the recent highs above the 1.1600 level. The prospect of a return to April lows at 1.1220, remains an outside possibility. We need a recovery back through the 1.1480 level to stabilise.
GBPUSD – the pound has continued to remain under pressure after peaking at 1.4770 last week, pushing below the 1.4460 area. Last week’s key day reversal continues to keep the lid on any rebound back towards the 1.4600 level. Only a break below 1.4300 would undermine the bullish scenario.
EURGBP – having failed to push above the 200 week MA the bias remains to the downside while below 0.7950. We have neckline support at 0.7750 from the March lows which, if broken could trigger a sharp down move. A move and close above 0.7940 retargets the 0.8000 area.
USDJPY – yesterday’s push back through the 107.80 level has opened up the possibility of a return to the 109.00 area, and even as high as the 110.20 level. Support currently comes in at the 106.80 area, with the 200 week MA at 105.30 the major support level.
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