Equity markets had another solid day yesterday on the back of rising optimism that the talks between China and the US on trade would be extended into March without any resulting rise in existing tariffs, after President Trump said he would be minded to allow the deadline to slip so long as progress was being made.
Reports that China’s President Xi himself would also be attending the talks this week in Beijing between US and Chinese negotiators added to the overall feeling of optimism, sending US markets to their highest levels this year.
The latest China trade numbers for January were surprisingly upbeat given the doom and gloom surrounding its economy as both imports and exports picked up in January. This strength would appear to suggest that recent stimulus measures by Chinese authorities are starting to have an effect, or they could merely be a pre Chinese New Year boost, as demand is brought forward from the February numbers.
Imports for January still showed a decline of 1.5%, but it was well above expectations of a 10.2% and much better than the 7.6% drop in December. More crucially exports rose, by 9.1%, much better than the 3.1% decline seen in December.
Markets in Europe had another solid session, though Spanish markets underperformed after the Spanish budget was blocked in the Spanish parliament, throwing up the prospect of an imminent general election in the coming weeks.
Later this morning we will get to find out if the German economy fell into recession at the end of 2018 when we get sight of preliminary Q4 GDP for Germany. In Q3 the economy contracted by 0.2% largely as a result of a sharp slowdown in the automotive sector, due to emissions regulatory changes and a slowdown in China. Earlier this year German authorities said that they expected the economy to just about avoid a contraction, but that growth would be a modest 0.1%. That calculus has taken a significant knock in recent weeks after data showing that not only did industrial production fall even further in December, but that the German consumer also retrenched sharply as retail sales declined 4.3%.
These numbers would suggest that there is considerable downside risk to the forecasts that we will see an expansion of 0.1%.
Following on from these Germany numbers we’ll also get sight of the preliminary EU Q4 GDP numbers which are expected to show no change from the Q3 expansion of 0.2%. A miss on the earlier German number to the downside or upside would have the potential to introduce the risk of a similar adjustment in these numbers.
On the subject of Brexit Prime Minister Theresa May will be putting forward a new parliamentary motion today that allows her to continue to negotiate with the EU to seek changes to the Irish backstop, as per the previous vote on the 29th January. MPs might seek to create mischief by attempting to amend the motion with an attempt to force another meaningful vote on the deal, try and force a vote on a second referendum, or to revoke article 50.
Despite the recent pause announced by the US Federal Reserve the US dollar has continued to push higher, hitting a two-month high against a basket of currencies, largely due to a softening of economic activity elsewhere around the world. The euro has come under pressure, along with the Japanese yen and the pound due to recent softness in the latest economic data which is raising the prospect that any one of these central banks may well have to ease policy again sometime in the near future.
EURUSD – hasn’t followed through on the key day reversal though it hasn’t as yet fallen below the 1.1250 level, which could well prompt further losses towards the November low at 1.1215. A fall below 1.1200 opens up the 1.1000 level. A move back above 1.1350 opens up a move towards 1.1400.
GBPUSD – still looks soggy but is still managing to hold above the 1.2820 level for now. While it does the risk remains for a move back towards the 1.3020 area. A move below the 1.2820 level could well open up a move towards 1.2700. Any rebounds need to move back above the 1.3020 level to stabilise.
EURGBP – edging back towards the highs last week at 0.8820. A move through here opens up the 200-day MA at 0.8860. While below 0.8820 the risk remains for a return to the 0.8720 area.
USDJPY – appears to be closing in on the 111.30 area and 200-day MA. A break of the 200-day MA opens up the 112.30 area. Support now lies back near the 110.20 level, this week’s breakout level.
FTSE100 is expected to open 16 points lower at 7,175
DAX is expected to open 23 points higher at 11,190
CAC40 is expected to open unchanged at 5,074
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