Equity markets endured another disappointing week last week as concerns about a possible recession kept investors on the back foot.
It appears that softening economic data and disappointing earnings reports is contributing to a negative feedback loop and worries about the financial health of European banks aren’t helping, which was prompted by some very weak numbers from Germany’s Deutsche Bank (DE:DBKGn), which has sent the FTSE 350 Banks index back to levels last seen at the height of the sovereign debt crisis in 2011.
The questions of non-performing loans as well as shrinking margins are creating an increasingly difficult environment for European lenders and it would appear that investors are slowly waking up to the reality that negative rates aren’t likely to help the profitability of a sector that is still dealing with the legacy of the sovereign debt crisis.
While the headline number of 151k in Friday’s US payrolls report was a slight disappointment it still managed to keep alive the prospect of further possible US rate rises later this year due to the unemployment rate falling to 4.9%, and average earnings rising slightly more than expected.
It also reinforces the possibility of continued divergence in US monetary policy with that of the rest of the G7, where we’ve seen the Bank of Japan follow the European Central Bank into the realms of negative interest rate policy.
What Friday’s payrolls numbers do not do is mean that further rate rises are a done deal, but they did prompt a modest recovery in the US dollar, which endured its worst week in some years as markets dialed back their expectations of US rate rises this year.
Recent events do appear to have caused concern amongst some senior Fed policymakers with notable shifts in tone from Stanley Fischer, Deputy Fed Chairman, and the New York Fed’s William Dudley in comments made last week.
It is these concerns about global growth, the Chinese economy and global deflationary forces that has seen equity markets remain under pressure since the beginning of the year with the DAX closing last week at its lowest level since October 2014.
While equity investors are likely to get a break this week from concerns about the Chinese economy due to Chinese New Year, attention is now set to switch to Washington DC when Fed Chair Janet Yellen gives testimony to US lawmakers on Wednesday and Thursday, and her comments are likely to be closely scrutinised for any evidence of concern about weakness in the US economy, in light of some of the softness in recent US data.
Some positive signs did come out of last week with strong rebounds in the basic resource sector as the FTSE 350 mining index managed to close higher for the third week in succession, as commodity prices continued to show signs of stabilisation, with strong gains for copper, iron ore, silver, platinum and gold prices.
Oil prices continue to show evidence that they may have seen a short term base, having posted higher lows for three weeks in succession, largely due to a weaker US dollar than any optimism that we’ll get some form of deal between oil producers to cut production, despite a weekend meeting between Saudi and Venezuelan officials..
EUR/USD – the euro ran out of a little bit of steam last week above at the 1.1250 level and as such we could see a drift back to the 200 day MA at 1.1050 area before pushing on towards 1.1400. A move back below 1.1040 could well see a revisit of the 1.0970 level.
GBP/USD – the pound had one of its best weeks since the middle of last year last week though it hasn’t been able to reverse this year’s losses yet. We need to hold above 1.4370 to keep the prospect of a move back to 1.4800, after seeming to find a base down at the 1.4220/30 area.
EUR/GBP – we appear to have found some support at the 0.7520 area and while above here the risk remains for a move back towards the recent highs at the 0.7755 level. A move through this level could well see a return to the 200 week MA at 0.7945.
USD/JPY – the downside appears to be looking vulnerable with the 116.00 area a key support level. We need to get back through the 118.20 level to stabilise or run the risk of a deeper move towards 114.00.
Equity market calls
FTSE 100 is expected to open 30 points higher at 5,878
DAX is expected to open 20 points higher at 9,306
CAC40 is expected to open 15 points higher at 4,215
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