Equity markets were already set for a strong week last week even without the double intervention of firstly ECB President Mario Draghi and then a surprise Chinese rate cut, which helped push equity markets in Europe to their highest levels since the end of September, and beginning of October while sending the euro sharply lower, against the US dollar and the Japanese yen.
As it was, a lot of last week’s economic data had already pointed to concern that both Europe and Asia as a trading bloc were underperforming
, so the fact that central banks remain committed to keeping the monetary spigots open, shouldn’t really be that much of a surprise.
There remains a concern being as to whether or not these actions will be in any way effective as central bankers embark on a race to the bottom,
as the People’s Bank of China joins the Bank of Japan, in further rate cuts and stimulus.
The initial catalyst for Friday’s moves began with yet another dovish speech by ECB President Mario Dragh
i, only this time he gave the clearest possible hint that the ECB was growing increasingly concerned about the strength of the recovery in Europe.
His comments to a banking conference that the ECB should “do what we must to raise inflation and inflation expectations as fast as possible”
was interpreted by markets that we could see further measures as soon as the next meeting in December, when the ECB updates its latest forecasts for growth and inflation.
The ECB President’s speech contained no less than 45 mentions of the word inflation,
reinforcing the central banks increasing desperation to try and put a floor under declining inflation expectations.
The big concern remains that the market may be overestimating the ability of the ECB to do anything significantly large enough
to really make a difference, given continuing German opposition to further relaxations in monetary policy.
The ECB’s job won’t be made any easier by the Chinese central banks decision to cut interest rates for the first time in nearly two years
, as they seek to offset their own slowing economy and deflationary problems, by implementing further stimulus of their own to underpin their own growth targets. With Europe being one of China’s biggest export markets there is a good chance that as well as their goods and services, Europe will also get China’s deflation as well.
While Friday’s events have helped push, and could well continue to push equity markets upwards, they are unlikely to have a significant effect on the underlying growth prospects of either the European, or Chinese economy, where businesses continue to remain reluctant to borrow and/or invest while domestic demand remains weak. This belief can be reinforced by data this morning that shows global business confidence has slumped to a five year low
with company investment and hiring intentions at their lowest levels since the financial crisis.
This week’s focus is likely to be on Thursday’s meeting of OPEC in Vienna,
and whether we see a production cut, where the recent fall in oil prices, while prompting concerns about deflation, has helped deliver its own fiscal boost to the consumer side of economies across the world, a fact no better illustrated than here in the UK, by falling fuel and food prices.
On the data front today’s November German IFO could well see a rebound in business confidence
after last week’s pick-up in ZEW economic expectations. Given some of the more recent economic data a strong rebound in sentiment would be a surprise with expectations for a slowdown from 103.2 to 103.0.
The ZEW is a gauge of investor which tends to correlate more closely with the performance of the German DAX
, while German businesses tend to be a little more hard headed
when it comes to expectations an order books, so should give us a better idea of how the German economy is perceived by the people who matter.
This week is also an important for the latest updates on Q3 GDP from Germany, the US and the UK
, as well as the latest unemployment and inflation data from Germany and the EU. If we are to get further clues as to what the ECB might do next week then Friday’s CPI data could well provide it.
– so much for that break higher, the euro slid sharply on Friday and looks set for a move down towards the 1.2040 level, having fallen below the 1.2400 level. If we can consolidate a move below 1.2350 this becomes more likely To mitigate the downside momentum we need to see a move through the 1.2580 level.
– the pound slid back on Friday but for now remains above support at 1.5590 and as such the broad range between 1.5735 and 1.5590 remains intact. A break either side could well determine the next move. Below 1.5590 targets 1.5430 while a move through 1.5750 could well see a move towards 1.5880.
– as suspected the failure to overcome the 200 day MA at 0.8050 along with trend line resistance from the September highs at 0.8040, saw the euro fall back sharply, through support at both 0.7980 and 0.7940. We now need to get back above the 0.7940 area, or we could well see further declines towards 0.7870.
– last week’s high at 118.98 has seen the US dollar drift back with a gravestone doji on the daily chart, followed by a bearish engulfing candle on Friday. Is this another false top or could we be set for a pullback? The US dollar still appears to be well supported for its move towards 120.00 on the dips with 115.40/45, the low last week likely to be a key support.
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