It’s becoming hard to imagine a scenario that will shake the market out of its current upward momentum after US markets once again closed at record levels yesterday, and for good measure the FTSE100 closed at its highest level since January 2000
, helped by a strong rebound in the mining sector, and also looks as if it could open at its highest level in over 14 years this morning.
These slow incremental gains which we’ve seen over the past few days
appear to have all the traits of a steady climb up a set of stairs, but the big worry remains that any trip back down is more likely to take the form of a sharp move lower in a broken elevator.
For now this exuberance continues to outweigh any concerns about the deteriorating situation in eastern Ukraine where the Donetsk and Luhansk regions declared themselves sovereign states
after the weekend referendums appeared to show a majority supporting independence from Kiev.
As a result Donetsk separatist leader Pushilin then raised the stakes further by requesting accession to the Russian Federation.
Markets have reacted to all of this calmly so far, given the lack of a response from Russia thus far, but given concerns about the integrity of the weekend ballot, any misstep over the next few weeks could well result in a far more serious deterioration if the Kiev government pushes back against recent events, which seems likely.
The rally of the past few days in European and US markets
has largely been driven by a tailwind from last week’s ECB meeting, and continued dovish jawboning
from Federal Reserve officials to offset concerns about the gradual reduction in monthly stimulus.
The mining sector was also helped by the announcement of some reforms from the Chinese State Council who relaxed limits on inward investment and capital flows on listed Chinese companies.
The market chose to ignore comments from Chinese President Xi
who went to great lengths yesterday to reinforce the narrative of a “new normal”
and make it clear that there would be no imminent measures to ease policy in the near term
, pushing back against calls for further stimulus, despite evidence of a slowdown in the Chinese economy.
This morning’s Chinese industrial production data for April
hasn’t done anything to alleviate these concerns, coming in at 8.7%, below expectations of 8.8%
while retail sales for April were also weak, coming in at 11.9%
, well below expectations of 12.2%.
The retail sales number is particularly worrying
as it shows that Chinese efforts to rebalance the economy towards internal consumption are proving more difficult
than expected. These poor numbers are likely to prompt further speculation about additional Chinese stimulus. It remains to be seen as to whether that will be forthcoming.
Back in Europe the latest German investor ZEW survey
is expected to show a slowdown in economic sentiment for May to 41 from 43.2; however given recent rally in the DAX this number could just as easily beat expectations.
Inflation is also set to play a big part in this week’s European data
starting with Italian final CPI for April
this morning which is expected to show a rebound from 0.3% to 0.6%.
After the recent weakness shown in US Q1 GDP data
, investors will be hoping for a strong bounce back in consumer spending when this afternoon’s retail sales numbers for April are released
. The March number came to the rescue after a disappointing January and February, rising 1.2% as pent up demand prompted a sharp rebound.
The April numbers are expected to settle back down at 0.4%, if the recent rises seen in consumer confidence data are anything to go by.
– after a 250 point range in two days at the end of last week, yesterday saw the euro trade in a 25 point range, finding support above the 100 day MA at 1.3740. The euro could well now be set for a test lower towards the April lows at 1.3675, a scenario which would only be delayed on a rebound back through 1.3850 to retarget last weeks high.
– a fairly tight range of 55 points yesterday the pound needs to hold above 1.6820 to signal a return through 1.6900. A break below 1.6820 could well see a move back towards the 1.6770 area and the 23rd April lows, while below that we have trend line support at 1.6690 from the November lows of 1.5855. While above 1.6770 the odds favour further gains and as such this level continues to remain important with respect to further progress.
– the euro continued its push lower yesterday hitting one year lows at 0.8144 as the pressure continues for a move towards 0.8090 and the 2013 lows. We need to see a rally beyond the 0.8250 area to diminish the downside risk and open up a retest of the 0.8300 area.
– having pushed above the 102.00 area the risk now remains for a move towards the highs this month just above the 102.80 level. The key supports on the downside remain at the March low at 101.20 as well as the 200 day MA at 101.00. We need to see a recovery back through the highs this month at the 102.80 level to suggest a move back to the highs at the beginning of April at 104.10.
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