While US markets managed to push higher towards a four month high on Friday, in the wake of a decent jobs report and ISM manufacturing survey, European markets have continued to struggle, with a sharp decline in the oil price acting as one of the primary drags, along with concerns about declining corporate profits.
The improvement in the ISM manufacturing index for March shouldn’t have come as too much of a surprise given recent better regional surveys, while the jobs data managed to come in broadly in line with expectations, and average hourly earnings rose 0.3%, a decent improvement on February’s 0.1% decline.
If one were to look for weaknesses in the numbers, it would be a rise in the unemployment rate to 5%, as well as the loss of 29k manufacturing jobs. There was also the fact that over half of the new jobs were in fairly low paid sections of the US economy.
Under normal circumstances these sorts of numbers would have had markets looking at this week’s FOMC minutes for clues as to a potential rise in rates later this month, but given last week’s slap down of the hawks from Fed chief Janet Yellen, this isn’t playing into the narrative at this time.
Given this change of tone Friday’s numbers were the type of goldilocks numbers that markets love, sending the US dollar lower, and US stocks higher. It does, however speak to a wider concern that the Federal Reserve is worried firstly about the strength of the US dollar, and also about the effect a stronger US dollar could have on certain parts of the global economy.
While a stronger US dollar is a concern for the Federal Reserve, a stronger euro is a concern for the European Central Bank, as on the day the ECB began its expanded bond buying program the euro hit its highest levels against the pound in sixteen months and the US dollar in five months.
Given that some of the more recent data out of Europe has started to show some minor improvements, this is likely to be a concern, especially given that this week’s economic data from the services sector could well have taken a hit from the fallout from the recent terror attacks in Brussels.
With European companies disappointing on the profits front, the last thing the ECB needs is for consumers across Europe to pull back on their consumption habits, at a time when there had been some evidence of a pickup in consumer spending.
As far as today is concerned the focus will be on the latest UK construction PMI data for March, after a slight improvement in the manufacturing numbers on Friday. In February the construction sector saw a drop in activity to its lowest level since May last year, albeit still at a fairly healthy 54.2. Expectations are for a modest improvement to 54.3.
The slight improvement in the Friday manufacturing data didn’t prevent a sharp slide in the pound on Friday despite a decent performance against the US dollar in March.
As the opinion polls continue to show no signs of the “Remain” camp making the case for staying in investors are becoming increasingly anxious, pushing up the cost of buying protection against a fall in the pound above the levels seen during the financial crisis in 2008, a level that does appear rather excessive.
EUR/USD – having hit a 5 month high of 1.1438 last week the euro has slipped back a touch, with the next resistance at 1.1500, the October highs. Pullbacks should find support around the 1.1320 and 1.1140 areas. Only a move below 1.1030 argues for a move towards 1.0800.
GBP/USD – having failed at trend line resistance at 1.4460 last week the pound slid back finding support at 1.4170. A move through 1.4500 has the potential to target a move towards 1.5000. A move below 1.4050 argues for a move towards the recent lows at 1.3835.
EUR/GBP – having broken above the 200 week MA at 0.7945 area, this should act as support for a further move towards the 0.8100 area. Only a move back below 0.7900 argues for a drift back down towards 0.7820.
USD/JPY – the US dollar continues to look soft with a retest of the 110.70 area the preferred outcome on the way to a move towards 106.00.
Equity market calls
FTSE100 is expected to open unchanged at 6,146
DAX is expected to open 35 points higher at 9,829
CAC40 is expected to open 5 points higher at 4,327
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