Compared to twelve months ago stock markets in Europe have been fairly sedate, and look set to post some decent gains in what has in the past couple of years not been a particularly good time for equity markets.
While markets in Europe managed to post a strong session yesterday, the weakness in the FTSE100 notwithstanding, due to weak commodity prices, US markets also slipped back, hindered by talk of the prospect of two potential rate rises by year end, though the decline in Apple's (NASDAQ:AAPL) share price didn’t help either, as the row over its tax affairs in Ireland prompted a little bit of share price weakness.
The decision by the European Commission to retrospectively look to claw back billions of euros may seem like a good idea to all those who think that US companies don’t pay enough taxes, but it doesn’t make for good policy.
When authorities in India attempted something similar with Vodafone (LON:VOD) a few years ago it made companies think twice about investing in the region, and the European Commission may well find that its stance has unintended consequences for future investment by US companies in Europe as a whole.
Closing a tax loophole is one thing, but changing the rules and then claiming back tax that is allegedly owed is another, and probably beyond the Commission’s remit. One thing is certain, the only winners here will be the lawyers.
Recent economic data appears to have prompted speculation that we could see further easing from the European Central Bank at next week’s rate meeting, hence yesterday’s gains in broader European markets and weaker euro.
Last week’s weak German IFO number combined with declines in yesterday’s confidence numbers, along with stubbornly low inflation appears to be prompting this line of thinking.
This seems somewhat premature given that we’ve seen inflation starting to show signs of picking up, something that is expected to be borne out by today’s EU CPI number for August, which is expected to tick up to 0.3% from 0.2%, which would be the fourth monthly rise in succession. Core prices are set to remain at 0.9%.
Before that, German retail sales are expected to show a rise of 0.5% in July, while unemployment for August is expected to stay at 6.1%.
Unemployment elsewhere in Europe is also in the spotlight today, with the latest Italian numbers for July expected to show a decline from 11.6% to 11.5%. The broader EU numbers are also expected to decline from 10.1% to 10%.
Back in the US while markets start to obsess again about Friday’s jobs report, given Fed vice chair Stanley Fischer’s comments yesterday, today’s ADP employment report will once again be looked at as a bellwether for this number, despite the fact that there has been no correlation at all between the two reports in the last three months.
While the ADP report has been broadly steady between 175k and 181k, between May and July, the Friday NFP report has been all over the map.
Expectations for today’s August ADP report are for 173k, down from the 179k in July.
EUR/USD – the next support sits near the 1.1120 area, and this needs to hold for a move back through the 1.1250 area towards 1.1400 and June highs. A move below 1.1120 retargets the low 1.1000s.
GBP/USD – while above the 1.3020 area the risk remains for a move back towards last week’s high near 1.3300. Below 1.3000 retargets the lows at 1.2800. We need to push through 1.3300 and trend line resistance there to target 1.3500.
EUR/GBP – still looks toppy despite finding support at the 0.8490 area, with only a break below targeting 0.8400. A move back through 0.8620 is needed to retarget the highs just above the 0.8700 area.
USD/JPY – looks like we could well retest the 103.50 area, but while below we remain vulnerable to a retest of the lows around the 99.50 area. The bias remains for a move towards the recent lows at 98.95, and potentially lower towards 95.00, and levels last seen in June 2013.
FTSE100 is expected to open 2 points lower at 6,818
DAX is expected to open 4 points lower at 10,653
CAC40 is expected to open unchanged at 4,457
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