As we head into a long bank holiday weekend the overarching theme from this week has been rising concern that the recent recovery in Europe appears to be stalling out already.
The recent rebound in the euro and the oil price, along with a jump in bond yields appears to have prompted a slight change in policy on the part of the ECB, after the surprise announcement by Benoit Coeure that the central bank would be looking to front load its bond buying program in an attempt to keep a lid on yields after the recent sharp rise seen in recent days.
This decision could also have been influenced by the rising uncertainty which could well accompany a potential Greek default, as the likelihood of a swift agreement before the next IMF payment on the 5th June, becomes ever more remote.
While this had the desired effect in sending the euro and yields lower, the effects were somewhat undone by the fact that we’re also seeing a slowdown in the US economy, with no indications whatsoever that the weakness seen in Q1, will translate into a recovery in Q2. Apart from jobless claims yesterday, we got a number of data misses, from existing home sales to manufacturing data, which following on from Wednesday’s Fed minutes has served to push back the prospect of any move on rates into the back end of Q3
, at the earliest.
As a result of these concerns about economic weakness stock markets in the US and Europe have enjoyed strong gains with US markets closing last night at new record levels
, while European markets also look set to finish the week strongly, as they open at their highest levels in over two weeks, on expectations of easier for longer monetary policy,
though the FTSE100 continues to lag behind, its peers.
This week has seen German economic data in particular come in short of expectations
, with yesterday’s manufacturing and services flash PMI’s for May, coming up a little short. We also saw a disappointing ZEW survey, and if today’s May IFO business survey also comes up short
, then we could see concerns rise about the recovery in Q2 in Europe. the survey is expected to show a slight slowdown to 108.3 from 108.6.
The main focus though is likely to be on ECB President Mario Draghi’s speech in Portugal
where he is once again likely to warn governments that structural reforms must also be seen to take place, for the full effects of QE to be felt.
In the UK
fears about this week’s fall into so called deflation were put to one side yesterday with a bumper retail sales number for April, with a rise of 1.2% more than wiping out the 0.7% decline in March.
It would appear that the onset of Easter and some warm weather has prompted speculation that the British public went on a bit of a holiday spending spree with all the extra cash from lower food and energy prices buying lots of new summer clothing, though it is to be hoped that the spending didn’t extend to any form of “kiss me quick” headwear.
Aside from this welcome news today’s borrowing numbers are a reminder that we continue to spend more than we take in through taxes with the latest borrowing numbers for April set to show £7.9bn,
up from £6.7bn in March.
Also on the agenda today is the latest US CPI inflation data for April
in a week where the UK saw negative inflation for the first time in years, while the EU inflation numbers improved from negative territory to come in flat for April.
With US investors still holding onto the belief that the Fed will raise rates at some point this year
, the one thing that looks set to prevent them is weak inflation numbers, and given the weakness elsewhere in the world it is hard to suggest that the US would be able to stand apart from the slide in global prices.
The latest April CPI numbers are expected to come in at -0.2%
, weaker than the -0.1% seen in March, and while the Fed doesn’t specifically target CPI as its price targeting measure, they won’t be able to ignore the evidence in front of their eyes of weakening prices.
This is why all eyes will be on Fed Chair Janet Yellen later today when she makes her first comments since the publication of those minutes
. We can expect to hear “data dependent” quite a lot, but overall markets will be looking to see if her stance has shifted towards fellow voting member on the FOMC and Chicago Fed chief Charles Evans,
who has suggested twice this week that the Fed might well have to wait until Q1 next year before being comfortable about raising rates.
– currently finding support just above the 1.1050 level which needs to hold for the current rebound to maintain its momentum. Only a fall below the 1.1050 level negates the current upward momentum for a move towards 1.2000.
– with the trend line from the 1.4560 lows holding the pound has rebounded strongly back above the 200 day MA. This suggests the possibility of a retest of the highs at 1.5820, on the way for a move towards 1.6000. Trend line support now comes in at 1.5535.
– the euro has broken down through the previous lows at 0.7115 and looks set for a retest of the March lows at 0.7015. Resistance on any pullbacks is likely to be found at the 0.7120/30 area, which had been support up until yesterday’s break.
– the momentum remains intact for a move back to the highs at 122.00. We also need to be aware of trend line resistance at 122.15 from the 1990 highs at 160.30. Support remains near the recent range lows between 118.30 and 118.65.
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