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Europe set for a positive open, China retail sales slow sharply in December

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It’s not been a great start to the year for US stocks, with the S&P500 and Dow both finishing lower for the second week in a row, although the Nasdaq 100 managed to eke out a weekly gain, despite touching a three-month low earlier in the week.

For a good part of this year there has been rising anxiety on the part of US investors especially about the likely path of US rate rises this year, as concerns about more persistent inflation levels prompt more aggressive talk from members of the FOMC about the likely path of rate rises this year.   

With US markets closed today for Martin Luther King Day and Federal Reserve officials now in black out mode ahead of next week's monetary policy decision, the only drivers for markets this week will be the continuation of Q4 earnings season tomorrow, which got under way in earnest on Friday.

It’s been a similarly mixed start for Asia markets so far this year with the Hang Seng enjoying a solid week last week, while the Nikkei 225 finished down for the second week in a row, although it’s had a slightly more positive start to this week.

Today’s focus has been on this morning’s Q4 China GDP numbers which came in at an annualised 4%, which when you consider some of the estimates of 12 months ago is disappointing. As 2021 progressed it became ever more apparent that some of the forecasts may have been too optimistic, as a combination of port disruptions due to covid restrictions, supply chain issues, as well as surging power costs and enforced shutdowns of the Chinese economy, hampered economic activity in the second half of the year. On a quarterly basis the economy rebounded strongly from the 0.2% we saw in Q3, expanding by 1.6%

The performance of the economy also hasn’t been helped by the regulatory crackdowns by Chinese authorities on different parts of the economy, as well as the problems around Evergrande and the property sector.

As we look towards 2022, China’s zero-covid policy is also likely to make things worse, not only domestically, but globally as supply chains continue to struggle under new lockdown restrictions in the likes of Ningbo, China’s third biggest port, as well as Tianjin, and Xi’an, as Omicron outbreaks start to break out across the country. With a population that has a lower vaccine rate than a lot of its peers this zero-covid policy, if pursued to its fullest extent, could mean that China’s economy could well fall short again in 2022, unless the authorities have a change of heart, which at the moment doesn’t look likely.   

Reflecting that uncertainty December retail sales fell back sharply, coming in at 1.7%, well below expectations of 3.8%, although industrial production came in slightly better at 4.3%. In a sign that the central bank is concerned about the weakness in the economy, the medium-term lending rate was cut by 10 bps to 2.85% on its one year medium term lending facility

European markets have had a slightly more resilient start to the year, with the FTSE100 the standout performer thus far, up just over 2% so far this year, driven largely by the likes of the energy, basic resources, and banking stocks.

Today’s market open looks set to see European stocks open higher, with the main focus this week, away from US earnings, set to be on the latest wages, unemployment and inflation numbers from the UK economy, and the Bank of Japan tomorrow.

On the corporate front the main story at the weekend was the £50bn bid by Unilever for GlaxoSmithKline’s consumer healthcare business, of which it owns a 68% stake along with Pfizer, which Glaxo said it had rejected, no doubt in the hope that Unilever will come back with a higher offer of around £60bn, if reports are true.

This seems a stretch and could well depend on this morning’s share price reaction to the news. If Unilever shares dive sharply, then we can probably assume that markets think a raised bid, or any new bid for that matter, is probably not a wise move on Unilever’s part.  

EUR/USD – ran out of steam at the 1.148o area last week and slipped back towards the previous resistance at the 1.1380 level. As long as we hold above 1.1370 the road towards the 1.1520 area remains intact. Below 1.1370 retargets the 1.1280 area.  

GBP/USD – failure at the 200-day MA and 1.3750 area has seen the pound slip back, a move that could see a retest of the 1.3580 area. We need to break above 1.3750 to signal further gains towards 1.3830 initially, and on toward the 1.4000 area. We also have support at .3420 and this year’s lows.

EUR/GBP – continues to range between the support at the 0.8330 area, and resistance at the 0.8380 level, however we could see a squeeze higher towards 0.8430. The bias remains lower towards 0.8280 and the 2020 lows, while below 0.8380.

USD/JPY – rebounded from cloud support at 113.50, with the potential to move back towards the 114.70 area. We need to move back above the 114.80 area to retarget 115.30.


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