Since Friday’s disappointing payrolls report we’ve heard from a number of Fed policymakers who insisted that any decision to taper further would not be swayed by last week’s numbers with Atlanta Fed President Dennis Lockhart following St. Louis Fed member James Bullard by saying that he would continue to support further reductions in stimulus.
This seems to have accounted for the sharp sell-off seen late yesterday evening
which saw the S&P500 post its worst day in two months, as the dial starts to shift away from what had been until recently a one way bet on stock markets.
Given that this year’s voting members now include the rather more hawkish Dallas Fed’s Richard Fisher and Charles Plosser of the Philadelphia Fed, the prospect of another reduction of stimulus at the end of this month, set against rather lofty valuations has seen investors decide to take some money off the table
in a week that sees US earnings start to come in thick and fast starting with JP Morgan this afternoon.
Given that Plosser and Fisher are also due to speak later this afternoon o
n the economic outlook it probably won’t take a genius to figure out that they could well be hawkish in any comments they make with respect to stimulus reduction, and this could well have been another factor behind yesterday’s weakness, along with Goldman Sachs suggesting that markets could be in line for a 10% correction.
Despite this US bond markets have continued to see yields fall back suggesting that while equity markets might be worried about another taper bond markets aren’t, as yet.
As a result we can expect to see Europe’s markets open sharply lower this morning with
the main focus in the morning session likely to be on the latest UK inflation numbers for December.
Last month saw UK inflation for November fall to a four year low at 2.1%
largely as a result of falling fruit and vegetable prices and the fact that recent utility price rises had yet to kick in.
In December the expectation is for prices to remain at 2.1%
on an annualised basis despite the effect of these price rises, which does seem rather optimistic given the steepness of the rises, though month on month prices are expected to rise 0.5%.
The thinking may be that heavy pre-Christmas discounting
could well offset the effect of the higher gas and electric prices. Be that as it may, retail prices (RPI) are still expected to rise to 2.8%
, thus maintaining the income squeeze while house prices are expected to rise 5.9%.
In Europe the French President Francois Hollande
is due to give a press conference outlining his plans to try and revive the weak French economy. Unfortunately for him the media are more likely to be interested in details of his private life after weekend revelations of an alleged affair with an actress.
Back in the US
we get the latest look at the shopping habits of the US consumer
and an indication of whether the sharp jumps seen in October (0.6%) and November (0.7%) retail sales can be sustained into December. Given that we saw a 1.3% rise combined for both months, it would be rather surprising if December followed a similar pattern, given some of the warnings about the retail outlook we were getting from US retailers at the end of Q3.
Expectations aren’t particularly high with December retail sales
expected to show a rise of 0.1%,
which if we get another disappointment on top of Friday’s payrolls, could well see US markets lose further ground.
– the euro continues to remain fairly well supported with the key support remaining just above the 100 day MA at 1.3550. Despite this resilience it has struggled to move beyond 1.3700 which makes it susceptible to a pullback. The key resistance remains at 1.3880, which is long term trend line resistance from the all-time highs at 1.6040, a break of which could well see a move towards 1.4000.
Only a move below 1.3550 would undermine the current uptrend and argue for a move towards 1.3475.
– yesterday’s fall in the pound brought us back to trend line support at 1.6360 from the 1.4815 lows in July last year, with the lack of any rebound looking a touch worrying. A break below 1.6350 could well see further losses towards 1.6250, and even a move towards 1.6110. Any rebounds need to get back above 1.6500 to retarget the 1.6600 level.
– yesterday’s break above the 0.8330 area would seem to suggest that we could well get a move towards the 0.8400 level and possibly trend line resistance at 0.8425 from last August’s high at 0.8770.
The longer term objective at 0.8160/70 remains but it could well take a little longer to get there, with support now at 0.8320, and below that at 0.8270.
– a continued fall in the US dollar the risk of a lower US dollar is playing out as we head towards the 102.00 area. This would represent a 38.2% pullback from the October lows at 96.55 to the recent highs at 105.50. Any pullbacks look likely to find resistance at the 103.70 area at this point as the US dollar gears up for further losses towards the 100.00 area.
CMC Markets is an execution only provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.