European markets look to open mixed on Monday before the release of business sentiment data at the start of what could be a patchy week of trading that includes the US Thanksgiving holiday. US markets will be closed this Thursday and the NYSE is closing early at 1pm ET on Friday.
Even as they looked stretched to the upside, markets passed the geopolitical test of the Paris bombing and then the Mali hotel siege. European averages finished near three-month highs whilst the in the US, the Dow Jones erased this year’s losses and the S&P 500 had its strongest week this year, up 3.27%.
The economic impacts for Europe of the terrorist threat are real. The CEO of Siemens said it would affect investment and with schools and trains closed in Brussels, spending is also likely to be impacted.
Investors in the last week have managed to brush off hawkish minutes from the Federal Reserve and a hefty drop in oil prices with WTI crude now at three-month lows of $40 per barrel. The removal of uncertainty over December’s US interest rate decision and the ECB’s plans for additional stimulus have more than offset the concern over higher rates and lower commodity prices.
A barrage of dovish speeches by ECB president Mario Draghi has sent the euro to seven-month lows versus the dollar. Mr Draghi’s final speech on Friday in which he said the ECB will “Do what we must” to lift inflation means investors have largely priced in a 10bp deposit rate cut and the extension of QE.
The policy divergence between the US and Europe’s central banks is likely to continuing weighing on the euro. Dollar upside was limited last week even though the October minutes made a stronger case for a December lift-off. Hedge funds increased bullish bets on dollar most since 2014 according to CFTC.
The risk is that dollar bulls get overcrowded, bringing about profit-taking in the shortened holiday week. Markets are reaching a point when the December rate hike is close to priced-in so data will need to signify a faster tightening cycle to justify more USD strength.
A dovish Bank of England, an autumn statement that signifies fiscal tightening and the brexit debate are all big negatives for the British pound this week. Neither Core CPI rising last week nor signs of growing GDP this week are likely to offset the negatives for the time being.
EURUSD – The euro closed the week below 1.07. The trend is still down with lower lows and lower highs being made on a daily candlestick chart. The bearish engulfing pattern on Friday suggests a move toward 1.05 multi-year support.
GBPUSD – The pound fell sharply away from its 200 DMA on the last two days of the week. Pair is in a downwards sloping channel which would suggest a new lower low and a test of 1.50.
EURGBP – The euro-sterling cross is still within what could be a long-term bottoming pattern. An inverse head and shoulders was invalidated by the move below the left shoulder at 0.7014. There still could be a double bottom at July’s low above 0.69.
USDJPY – The dollar-yen is struggling to get above the broken long-term rising trendline. A bearish RSI divergence between the November 9 and 18 peaks could suggest a larger correction beneath 122.
Equity market calls
FTSE100 is expected to open 29 points lower at 6,305
DAX is expected to open 3 points higher at 11,122
CAC40 is expected to open unchanged at 4,910
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