An end of month rebound in oil prices wasn’t sufficient enough of a reason to see US stocks finish the month on a positive note last night, though it was enough to see prices just about finish the month in positive territory, having been down over 10% at one point and posting their best month since October.
This weak finish in the US looks set to spill over into Europe this morning, after a mixed session yesterday. Markets in Europe underwent a mixed session on Monday, after the latest G20 communique came up short of fairly low expectations. However, they soon pulled off their lowest levels after the People's Bank of China lowered the reserve requirement ratios on its banks by 0.5%, in an effort to help push extra cash into the Chinese economy.
While yesterday's late recovery was enough to see the FTSE 100 just about finish a turbulent month in positive territory, largely as a result of firmer commodity prices, it wasn't enough for the rest of Europe's markets, which finished lower for the third month in succession as growth concerns continued to weigh on investor sentiment.
The timing of yesterday's Chinese easing move shouldn't have been too much of a surprise given that the G20 meeting is now in the rear view mirror. The Chinese do have form for keeping things on an even keel in the lead up to these sorts of gatherings, to avoid criticism, before loosening the reins in the aftermath. While this morning’s manufacturing PMI numbers aren't too much of a surprise, both coming in worse than expected at 49 and 48 respectively, the concern is that the services sector isn't exactly firing on all cylinders either.
While this morning’s February manufacturing PMI numbers came in below expectations, the official non-manufacturing number also showed a slowdown, coming in at 52.7, down from 53.5, which rather helps explain yesterday’s action by the Chinese.
Back in Europe, the race to the bottom for interest rates looks set to continue after the latest EU CPI numbers for February showed a sharp drop in both headline and core CPI inflation, with the headline number dropping into negative territory at -0.2%, for the first time since September, due to the recent sharp drop in oil prices.
Of more concern was a drop in core prices to 0.7%. This weakness in prices is likely to increase pressure on the ECB next week to do more on the policy front, despite the G20's acknowledgement that monetary policy should not be a substitute for structural reform.
As if to emphasise the political resistance to structural reform, and the hollow and meaningless G20 pledges to enact it, we saw French President Hollande once again delaying much needed labour market reforms to the French economy. This was largely due to trade union opposition, as the ongoing cycle of weak and ineffectual politicians expecting central bankers to somehow fill the policy void for them continues its repeating circle.
Any further moves to cut rates further into negative territory is only likely to exacerbate further the problems for the banking sector in Europe, with the whole German yield curve out to 9 years now in negative territory. With even Slovakian 5-year bonds showing a negative yield, central bankers surely have to become more creative than this, otherwise they will make the European banking crisis even worse. The ECB really needs to think very carefully as to the wisdom of further deposit rate reductions, given that they still show no signs of working. The current direction of travel is insane and surely cannot be sustained.
While falling prices remain a concern, the manufacturing sector continues to display worrying signs of a gradual slowdown. Today's latest February manufacturing PMI numbers from Spain, Italy, France and Germany are expected to reinforce these concerns, with both the German and French measures expected to show stagnation.
On the unemployment front while we have seen some improvement in recent months the latest EU unemployment numbers for January are expected to remain unchanged at 10.4%.
The latest UK manufacturing PMI numbers are expected to show further weakness, down from 52.9 to 52.3, though recent sterling weakness might help on the margins.
In the US we can expect to see further weakness in the latest ISM manufacturing numbers after a really soft February Chicago PMI manufacturing number yesterday. The sharp jump seen in January saw a sharp reverse to 47.6, with all major components also showing some worrying weakness.
EUR/USD – slipped below the 1.0900 area yesterday raising the prospect of further losses towards 1.0620, trend line support from the 2000 lows at 0.8230. We need to get back through the 200 day MA at 1.1050 to stabilise for a move higher.
GBP/USD – continues to look weak with the risk of a move towards the 2009 low at 1.3500. The lowest monthly close since 1985, below 1.4000 could well be the precursor to further losses, towards 1.3000. We need to see a recovery back through 1.4090 to stabilise.
EUR/GBP – has stalled out just below the 200 week MA which is the key resistance on the upside at 0.7945. A weekly close through here could well see further gains towards 0.8100. Support lies all the way back near the 0.7720 area.
USD/JPY – the US dollar appears to be finding support around the 111.00 area for now, with twin support at this level for now. With resistance at 114.80 we would need a technical break of 116.00 to argue a short term base is in place. While below 115.00 the risk is for a larger move lower to 106.00 in the longer term.
Equity market calls
FTSE100 is expected to open 50 points lower at 6,047
DAX is expected to open 110 points lower at 9,385
CAC40 is expected to open 53 points lower at 4,300
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