European markets saw a mixed session yesterday, slipping back from their intraday highs despite the FTSE100 managing to post a new two year high.
While the DAX and CAC40 still managed to finish the day higher, the FTSE100 finished marginally lower, largely due to a sharp decline in oil prices, which acted as a wider drag on the energy sector.
It’s not immediately apparent what caused the sudden fall in oil prices, as we saw the biggest one day fall this year, although a couple of different factors have been blamed.
The first one was the resumption of talks between Iran and the US, over a nuclear deal which might allow Iranian oil exports to return to the international market. While a new oil deal may well get agreed the likelihood of a quick agreement remains highly unlikely, as well as the fact that we’ve been here before, so it would be unwise to raise too many hopes.
The other factor was comments from French President Macron that his meeting with Russian President Vladimir Putin had gone well, and had prevented a worsening of the crisis, although this was later denied by the Kremlin.
While both seem plausible enough, the most probable reason for the fall in crude oil prices was that we were well overdue a correction, and yesterday’s falls are simply straightforward profit taking after seven weeks of gains.
The US dollar had another strong day, along with further weakness in bond markets, which pushed US 10-year yields to two-year highs above 1.95% and 2 year yields above 1.33%.
US stock markets appear to be becoming more comfortable with the sharp increase in yields, finishing higher on the day across the board.
The increase in yields hasn’t been confined to US bond markets, with the UK gilt yield returning to levels last seen at the end of 2018 at 1.48%, while UK 2-year gilt yields hit their highest level in over 10 years at 1.35%.
This week’s focus continues to be on tomorrow’s US CPI numbers for January, with most of the market risk being priced towards a reading that could well come at the higher end of expectations. Consequently, this raises the possibility that a downside surprise could prompt a sharp counter reaction in the other direction.
It has been notable that ECB governing council members have been rowing back the more hawkish interpretations of last week’s comments by ECB President Christine Lagarde, with French governing council member de Villeroy suggesting that the market reaction may well have been too strong.
This perhaps shouldn’t be too surprising given that French CPI is at 3.8%, well below the likes of Germany, Netherlands, and Spain levels.
Ahead of today’s European open we look set to open higher largely due to Asia markets rallying strongly, as they picked up the baton from last night’s positive US close.
EUR/USD – continues to slip back from last week’s highs and resistance at the 1.1485 level. A break below support at the 1.1380 area signals a move back towards the 1.1270 area. Above the 1.1500 area retargets last November’s highs at 1.1615.
GBP/USD – remains under pressure as it slips back from the 1.3600 area, with a break below 1.3470 potentially targeting a retest of the 1.3400 area, where we have trend line support from the December lows. A break above 1.3620 retargets 1.3720.
EUR/GBP – slipping back from the 0.8480 area, while we have wider resistance at the 200-day MA at 0.8510. Support comes in at the 0.8420 area, a break of which targets 0.8370.
USD/JPY – continues to edge higher with a break above 115.70 targeting the January peaks at 116.35. Support comes in at 114.70.
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