European markets look set for a positive start this morning taking their cues from a positive Asia session despite a disappointing day yesterday, as a higher euro weighed on sentiment, while the weak pound helped underpin the UK markets with the FTSE 250 closing higher after UK inflation dropped back sharply in June, as lower oil prices over the period cut UK consumers a little bit of slack at a time of squeezed incomes.
In the US it was a tale of two sectors with banks falling back while technology stocks helped propel the NASDAQ to yet another record peak after Netflix (NASDAQ:NFLX) reported a 5.2m memberships in Q2, well above the 3m number expected. Facebook (NASDAQ:FB) also posted a new record high, as investors piled in ahead of next week’s earnings numbers.
Banking stocks underperformed after Goldman Sachs (NYSE:GS) saw a 40% drop in its investment banking division, following on from a similarly weak performance from JP Morgan (NYSE:JPM) in its Friday numbers last week, which in turn pulled down its UK peers Barclays (LON:BARC) and Royal Bank of Scotland (LON:RBS).
The German DAX suffered its biggest one day loss in nearly three weeks yesterday as the euro surged across the board, something the European Central Bank is unlikely to be too happy about, when it meets tomorrow for its latest monetary policy meeting.
While the economic outlook has improved in Europe, markets are now betting it is only a matter of when the ECB starts preparing the ground for a slow retreat from its stimulus program.
The Trump administration is also helping by appearing to undermine the US dollar at every available opportunity with what can only be described as either incompetence or sheer stupidity. Another failure to enact policy reforms this time on health care is raising serious questions as to whether this administration will deliver on any of the promises it made at the end of last year, with serious doubts now being expressed about tax and banking reform.
It seems that even with a majority in both Houses, the Republicans appear unable to even agree amongst themselves as to what is best for the US economy. It appears that the US government is giving the UK government a run for its money in the incompetence stakes. It doesn’t help that neither country has a competent opposition to offset this.
President Draghi will certainly have his work cut out in keeping a lid on the euro at this rate, as the market gears up for tomorrow’s ECB rate meeting, with a move to the 1.2000 level a distinct possibility on a break of 1.1620 and last year’s high.
Markets will also have one eye on the latest Bank of Japan rate meeting early tomorrow morning, which on a fairly data light day could well keep most market participants on the sidelines today.
EURUSD – we remain on course to test the 2016 highs at 1.1617, with support now at the 1.1480 area. If we break below the 1.1480 area we would then be susceptible to a pullback towards the 1.1300 area. Only a move below 1.1280 opens the possibility of a move back to the 1.1100 June lows.
GBPUSD – despite falling back from the 1.3120, the pound has managed to hold above the 1.3000 area, keeping the prospect of a move towards 1.3300 on the table. A move below 1.3000 could well trigger some stops towards 1.2930, but while above 1.2900 momentum remains positive.
EURGBP – pushed back through the 0.8820 level and moved back towards the 0.8900 area and the highs last week, keeping the bearish outlook just about intact after last week’s bearish reversal. We’ve since slipped back after failing at 0.8900, and could slip back further towards the 0.8820 area.
USDJPY – retested and rebounded from the 111.60 area and 200 day MA, however the US dollar looks vulnerable. We need to recover back through the 112.30 area to look at a retest of the 113.20 area. Below 111.60 opens up the 110.20 area.
FTSE100 is expected to open 25 points higher at 7,415
DAX is expected to open 25 points higher at 12,455
CAC40 is expected to open 18 points higher at 5,191
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