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Europe set for a subdued start, as oil prices start to retreat

oil rigs at sunset

Yesterday saw another disappointing session for the FTSE 100, once again finding itself undermined by disappointing company earnings reports, and a rather hot October UK inflation report, which saw CPI hit its highest level in over a decade, while the retail price index pushed even higher, to levels not seen since 1990.

While the FTSE 100 was getting dragged lower, markets in Europe were showing slightly more resilience, with the DAX and CAC 40 once again making new record highs, however the gains we’ve seen this week have been incremental, rather than impulsive in nature, suggesting a certain amount of caution.

US markets also gave up some of the gains from the previous day, as worries about accelerating costs outweighed another set of decent company updates. While companies are managing to report solid Q3 numbers, the ability to do so is being tempered by concerns about slimmer margins, and it is this that appears to be prompting an element of profit taking.

Today’s European open looks set up for a cautious start, with Asia markets trading softer, although the Nikkei 225 has pulled up sharply from its lows on reports that Japan’s latest fiscal stimulus package will be in a huge 55.7trn yen, or around $484bn. This would be on top of the over 80trn yen already spent since the beginning of 2020.

The fragmented nature of some of the moves we are seeing appears to suggest that while investors are encouraged in some part by the ability of companies to absorb some of the increases being seen through their supply chains, there is rising uneasiness about how long they will be able to do so.

There was some respite for oil prices yesterday, Brent crude sliding to a one month low, on reports that the US and China were looking at a co-ordinated SPR release to try and ease some of the pressure on consumers wallets in the lead-up to Christmas. A stronger US dollar only helped to accelerate this weakness, helping to push copper prices lower as well.

For all the increasing concern about rising inflationary pressure bond yields slid back yesterday as markets try to establish how much of the current inflation surge is persistent, and how much is transitory, as well as the wider question of when the first increase in rates is likely to materialise.

The fall in yields served to help push gold prices back up towards the 5-month highs we saw earlier this week.

One positive thing, aside from the concern over rising inflation, has been the resilience of labour markets, on both sides of the Atlantic.

Today’s latest jobless claims numbers from the US are expected to continue the trend lower in both the weekly and continuing claims numbers.

Weekly jobless claims numbers are expected to fall to 260,000, from 267,000, while continuing claims are expected to fall back towards the 2.1m level.

Earlier this week we heard from St. Louis Fed President James Bullard who suggested that with the acceleration in US inflation the Fed needed to be more hawkish and look to accelerate the taper program when they meet next month. His tone was significant as he is a voting member on the FOMC next year, and with the likes of John Williams of the New York Fed, Charles Evans of the Chicago Fed and Mary Daly of the San Francisco Fed all due to speak later today, markets will be listening closely to see if any of these three are thinking along similar lines.   

EUR/USD – dropped below 1.1300 and remains on course for a move towards the 1.1170 area, and June 2020 lows. To stabilise we need to recover back above 1.1400 to target a move back to the 1.1530 area.

GBP/USD – holding the line above the lows last week at 1.3350, but need to crack the 1.3500 area, as we are struggling just below the 1.3480/90 area, which is the barrier to a move towards the 1.3600 area. A break below 1.3350 targets a move towards 1.3160.

EUR/GBP – have breached the 0.8400 level, thus potentially opening the 0.8280 area. We have resistance at the 0.8470 level, and then behind that at the 200-day MA and the 0.8580 area.

USD/JPY – spilled over to 115.00 after breaking above the 114.75 area but have since slipped back. Did we see a bull trap yesterday? We need to move through 115.00 to target 116.00. Support comes in at 114.20.

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