We saw a strong start to the trading week for European markets yesterday, with decent gains across the board, however before one gets too bullish, yesterday’s moves kept us below the highest levels seen this month. US markets also had a good day, building on the rebound off Friday’s 18-month lows from the Nasdaq and S&P 500 to close modestly higher.
Having fallen for seven weeks in a row, US markets are overdue a bit of a bounce, and unlike the declines of the last few weeks, the Nasdaq 100 rally yesterday lagged that of the Dow and S&P 500, which led yesterday’s move higher. We could see further gains in the days ahead, however as with any bear market rally we need to see a move above previous reaction highs to gain confidence that a short-term low is in. For that we need to see a sustained move above 12,600 in the Nasdaq 100, and 4,100 in the S&P 500, and we’re still some way off that, as US futures slid back sharply after Snap cut its Q2 guidance.
While US markets closed in solidly positive territory yesterday, momentum overnight has waned with the result that today’s European open looks set to be a negative one, with the main focus today on UK public sector borrowing and flash purchasing manager index (PMI) data, as well as comments from ECB president Christine Lagarde.
UK public sector borrowing for April is expected to show borrowing rose by £17.9bn, a modest increase on March’s £17.3bn figure. Nonetheless today’s numbers are still expected to mark a significant drop from the same month last year, and the year before, when the UK government borrowed £28.3bn and £47.8bn respectively, due to the huge measures that were taken to support the UK economy during the pandemic. This fall certainly marks progress, however it is still well above the levels we saw in the years leading up to 2020, when April public sector borrowing for 2019 was as low as £6.2bn.
Today’s flash PMI numbers are rapidly losing credibility in terms of the headline numbers at least, when it comes to assessing the resilience or otherwise of the French, German and UK economies. In terms of the wider economy, it is quite apparent that economic growth is struggling across the bloc, as well as here in the UK. Yet to look at the PMI numbers it would be tempting to think that all is well. Nothing could be further from the truth, with rising energy prices and supply chain disruptions posing significant challenges to business, large and small.
Manufacturing and services PMIs are all expected to slow from the numbers we in April, all of which were in the mid-50s for all three of the UK, Germany and France, but the slowdown is not expected to be material. In France, manufacturing is expected to slow to 55.2 from 55.7, and services from 58.9 to 58.5. In Germany, manufacturing is expected to slow to 54, from 54.6, and services from 57.6 to 57.1. In the UK, manufacturing is expected to slow to 55, from 55.8, and services from 58.9 to 57.0.
We also have the latest CBI retail sales for May, which is expected to see a modest improvement from -35 in April to -30.
The US dollar underwent a bit of a slide yesterday, with the euro moving to within touching distance of a four-week high, after ECB president Christine Lagarde, along with a few other governing council members, indicated that rate rises would start in July in a blog post yesterday. She is set to elaborate further on those comments in an interview at Davos later this morning.
EUR/USD – has continued to push higher, above the 1.0650 area and looks set for a test of the 1.0800 level where we have trend line resistance from the February highs, as well as the 50-day MA. We currently have support at the 1.0530 area.
GBP/USD – has broken above the 1.2520 area but we now need to see a move beyond the 1.2630 area to argue a short-term base is in. We now have interim support at the 1.2470 area, and below that at the 1.2320 area. Above 1.2630 argues for a return to the 1.2830 area
EUR/GBP – rebounded from the 0.8420/30 area, with resistance still at the highs from last week at 0.8525/30.
USD/JPY – still have solid support just above the 126.80 area, but we’re currently struggling to move above the 128.30 level. A break below targets the 123.00 area. If 126.80 holds then a move towards the 135.00 area target remains intact.
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