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Europe set for lower open, despite improvement in China data

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European markets saw another record-breaking week last week, with the Stoxx 600 closing higher for the sixth week in succession, matching its best run of gains this year.

In a week that also saw new record highs for the DAX and CAC 40, US markets finished the week lower, albeit well off their lows, amidst concern that rapidly rising inflation could crush the potential for further positive company earnings.

Despite still record numbers of vacancies in the US jobs market, the latest Michigan Consumer confidence numbers for November showed sentiment falling to its lowest levels in 10 years.

It’s also been pointed out that consumers have become even more pessimistic than they were in April last year in the wake of the first Covid-19 lockdown, however this probably isn’t as surprising as it might be given the huge amounts of fiscal support available during the first quarter of 2020. With most, if not all, fiscal support now unavailable it's perhaps not surprising that US consumers are slightly more pessimistic, along with the fact that one year inflation expectations rose to 4.9%, levels last seen in 2008.

As we look towards another week the inflation genie has so far been the dog that hasn’t barked, however the volume over the apparent lack of urgency to rising inflation risks from central banks has been getting louder in the past few weeks. While those who are saying that central banks can’t do much about supply chain disruptions and shortages of products, and as such should look through the sharp rises in prices, are undoubtedly correct in some part, that view entirely misses the very real point that monetary policy could well be exacerbating some of this upward pressure in prices.

As such there is scope for central banks to move monetary policy off their current emergency settings without it causing too much disruption. For the moment, the two sides of the argument appear to be split between benign neglect, and a sharp tightening of policy to head off inflation risk when it comes to policy settings. There is a middle ground and central bankers need to get off their collective backsides and take it.

This week we’ll be getting the latest October CPI numbers from France and the UK, as well as German PPI, following on from last week’s US CPI numbers, which hit a 31 year high of 6.2%.

As we look ahead to this week, Asia markets have started the week rather mixed despite the latest Chinese retail sales numbers for October improving from 4.4% in September to 4.9%. This was a little surprising given the lacklustre import numbers in last week’s trade numbers, which showed that domestic demand was still on the weak side, however at least it shows that some optimism may be starting to return.

Industrial production also remained subdued, even as it improved modestly from 3.1%, to 3.5%, even with a lot of Chinese industry struggling to keep going due to currently elevated energy prices.

As a result of a fairly subdued Asia session, European markets look set to open in a similarly lacklustre fashion, and slightly lower from Friday’s close.

EUR/USD – continues to slip towards the 1.1400 area, with the potential to fall towards the 1.1170 area. the 1.1500 area. We have the potential for a move towards 1.1170, and June 2020 lows. To stabilise we need to recover back above the 1.1530 to retarget the 1.1620 area.

GBP/USD – found a modicum of support at 1.3350, however we need to push back above the 1.3430 level to stabilise and delay the prospect of further losses towards 1.3160.

EUR/GBP – while below the 200-day MA and the 0.8580 area the bias remains for a return to the 0.8470 area on a break below the 0.8520 area.

USD/JPY – decent resistance at the previous highs at 114.75, as well the highs last week at 114.30.  While below the 114.20 area the risk is for a move back below 113.70 towards 113.20.

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