Yesterday saw another positive day for European markets, rising for the third day in a row, shrugging off early week concerns about the Chinese property market, and despite evidence that the wider economy is slowing, due to increasing supply chain constraints.
The FTSE100 did its best to reprise its role as the perennial party pooper, sliding back from its intraday highs, to finish in negative territory, which in some part may have been down to the sharp rise in the pound, and gilt yields. Nonetheless markets in Europe, as well as the US are now back in positive territory for the week, a scenario that didn’t look very likely back on Monday, when fears of an Evergrande bankruptcy had investors circling the wagons.
US markets had another solid session with the S&P500 and Nasdaq both closing back above their 50-day MA’s, while markets in Asia this morning were mixed as the deadline for Evergrande’s US dollar payment came and went with no update on when and whether it would be paid. We now start a grace period of at least 30 days before a default can be declared, with Chinese regulators urging the company to avoid a default, with further bond payments also becoming due during that period.
The Nikkei 225 was higher as Japan played catchup after a bank holiday on Thursday, while Chinese authorities added liquidity for a third day in a row.
The rise in equity markets came despite a sharp rise in yields which saw the US 10 year hit a three-month high, and the UK 10-year gilt yield close at its highest level in over 2 years.
The surge in UK yields was particularly notable, after the Bank of England signalled concern over rising inflationary pressures, saying it was likely to peak well above 4% by year end, and that a “modest tightening of monetary policy” might be required in the not-too-distant future. Markets brought forward expectations for the first rate rise to the end of Q1 next year, which in turn helped pull the pound off a one month low against the US dollar.
As we look ahead to today's European open, where we can expect to see little change, the main focus is likely to be on Germany, and not just because the sun is setting on Angela Merkel’s tenure as German Chancellor this weekend, but also, we have the latest German IFO business climate survey in a week that saw the IFO downgrade its outlook for the German economy this year.
Yesterday’s flash PMIs for September pointed to a sharp slowdown in economic activity from the previous month, as rising energy prices, and difficulty in sourcing parts and materials prompted a pullback in both manufacturing and the services sector.
Today’s German IFO Business climate survey is expected to show another modest slowdown, from 99.4 in August to 99 in September.
EURUSD – rebounded from the 1.1680 level and now back above 1.1700, with the prospect we may have seen a short-term base. A break above 1.1760 opens up a return to the 1.1840 area. A break below 1.1650 opens up the prospect of a move to the 1.1600/10 level, and November 2020 lows.
GBPUSD – strong reversal off the 1.3600 area yesterday, and returned to the 1.3725 level, as expected. We now need to see a move above 1.3775 to reopen a path towards the 1.3900 area. A move below 1.3600 risks 1.3400.
EURGBP – fell back from the 0.8610 area and slipped back below 0.8560 to a low of 0.8537, with the bias now back towards the bottom end of the recent range. Also have support at the lows this month at 0.8500/10.
USDJPY – the strong moves of the past two days suggest we could see a move above 110.50 towards the previous highs at 111.60, with interim resistance at the 110.80 area. Support remains back at the 109.00 area.
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