What a difference a few weeks makes as the recovery in mining sector stocks continued apace yesterday. Since the lows set on the 20th January the FTSE350 mining index has managed to rally over 70%, as a combination of capex cuts, a weaker US dollar, and a stabilisation in commodity prices has helped mitigate some of the wider solvency concerns surrounding the sector.
The almost 20% rebound in iron ore prices yesterday to levels last seen in mid-June last year on expectations of a significant expansion to Chinese stimulus after the weekend pledges to meet a 6.5% to 7% GDP target, appears to be symptomatic of the febrile nature of the shifting sands of sentiment in financial markets currently.
Questions remain as to the sustainability of the gains given recent pledges to cut back on output and jobs in their steel and coal sector. Last week Chinese officials pledged to cut back nearly 2m+ jobs in their coal and steel sector, and in that regard Chinese output is likely to be much lower in the coming months and years, which suggests that this rebound could well be vulnerable to a setback.
This morning’s latest Chinese trade numbers for February speak to that concern about the Chinese economy as imports declined 13.8% and exports declined 25.4%. Expectations were for a 12% decline in imports and a 14.5% decline in exports. While some of this will undoubtedly be put down to the timing of the lunar New Year the numbers are nonetheless still pretty poor with the export performance the worst since 2009.
Oil prices also hit their highest levels this year, above $40 as traders speculated that falling US output would eventually translate into falling inventory levels. With talk of another producers meeting scheduled for later in the month and a weaker US dollar the line of least resistance appears to be for a move back towards the $45 a barrel level as bearish bets get ripped out.
Despite yesterday’s gains in commodity prices European markets struggled to maintain their recent momentum as investors looked ahead to this week’s ECB rate decision, with banking stocks leading the declines in Europe. Italian banks once again were getting clobbered as concerns about non-performing loans resurfaced again.
The Bank of England will also be in focus this morning as governor Mark Carney testifies to the Treasury Select Committee on the implications of the referendum vote.
Policymakers are likely to have questions on the timing of yesterday evenings specific pre-announcement of three extra liquidity auctions for banks at around the time of the June Brexit referendum.
Questions will inevitably be raised as to not only the timing of it, a week before next week’s budget, but also why the Bank felt it necessary to publicise it when they felt no such compunction to do so before the Scottish referendum vote.
Whatever the rights and wrongs of last night’s public announcement the bank is running the risk of becoming a political football and while it is surely sensible to implement a policy of contingency planning, surely it would have been just as easy to inform MPs today that measures were being put in place, and notify the banks the facility was available if needed without making a melodrama out of it?
Anyone would think we’re voting to leave the euro, we already have our own currency, which means a bank run is highly unlikely.
EUR/USD – the 200 day MA at 1.1050 remains a key resistance, with a break targeting the 1.1200 area. Support remains at last week’s low at 1.0800, with a break targeting 1.0600.
GBP/USD – continues to look well supported on dips with the potential for further gains towards 1.4400. To maintain the current momentum we need to hold above the 1.4080/90 area, to keep the bullish momentum intact. A fall below 1.4080 retargets the lows at 1.3835.
EUR/GBP – last week saw a bearish engulfing reversal suggesting the potential for further losses towards 0.7520. We need to get below support at 0.7690 for this to unfold, and stay below the 0.7830 level.
USD/JPY – currently range bound between support at 110.00 and resistance at 114.90 we need to see a break one way or the other for clues as to the next move. 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 37 points lower at 6,145
DAX is expected to open 53 points lower at 9,735
CAC40 is expected to open 20 points lower at 4,422
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