It turned out to be a disappointing start to the quarter yesterday with European and US stocks sliding sharply, despite some fairly resilient economic data on both sides of the Atlantic.
Some have put yesterday’s weakness down to a nervous reaction to the metro bombing in St. Petersburg, however if that were the case then US markets would probably not have been able to recover a good part of their losses into the close.
Ultimately US investors continue to retain their touching optimism that President Trump will have better luck in getting a deal on health reform, or some form of deal on tax reform, though yesterday’s caution is more likely as a result of some key events later this week, including FOMC minutes, the China summit, and US payrolls.
This rebound in US markets, even though they finished the day lower, has translated into a mixed session in Asia with the Nikkei tumbling on the back of a stronger yen, and more woe for Toshiba (T:6502), though Chinese markets have performed better.
This bi-polar reaction appears to be symptomatic of the mixed signals coming from the US economy, as well as some uncertainty about this week’s summit between US President Trump and China’s Xi, while US domestic uncertainty is reflected in the economic data.
A strong ISM manufacturing survey bodes well for this week’s March payrolls report, while consumer confidence is booming. Despite this US auto sales came in much lower than expected in March, while last week’s personal spending data was also weak, suggesting a cautious US consumer in contrast to the confidence numbers.
The decline in oil prices didn’t help either as another rise in US rig counts at the end of last week to levels last seen in October 2015 once again acted as a reminder that US shale producers continue to add supply at a rate faster than OPEC producers can cut it. In fact US shale producers added new rigs this quarter at the fastest rate since mid-2011.
The return of Libyan production after a week-long shutdown also helped undermine prices, and it is easy for OPEC secretary general Barkindo to talk about the prospects of falling stock piles bringing the market back into balance, however, the fact remains that it is likely to happen at a much slower pace than originally envisaged, unless OPEC and non OPEC members decide to extend the current production curbs beyond the original June deadline.
The pound had a disappointing day yesterday sliding back after manufacturing activity in the sector came in at its lowest level this year and its lowest since November last year.
Input prices have continued to rise, but there is some evidence that we could see some plateauing as businesses adapt to the lower exchange rate.
The slowdown in the PMI data does contrast to some recent surveys which suggested that the sector is doing quite well given a recent report from the CBI Industrial trends survey which showed that export orders were at their best levels in three years.
Today’s construction PMI numbers are expected to show that the sector remained steady in March at 52.5, unchanged from February. The big numbers though are tomorrow’s services numbers but that doesn’t mean that today’s construction numbers are any less important.
EURUSD – while below the 1.0720 area the risk remains for a move towards the 1.0600 initially and potentially 1.0580. We need to get back above the 1.0780 level to stabilise.
GBPUSD – the pound is currently looking a little soggy after failing to push through the 1.2550 area. We could slip back towards the 1.2350 area, but while above here the risks favour a move higher through 1.2700 towards the 1.3000 area. Only a move below the1.2350 area would call this into question.
EURGBP – currently short squeezing higher, with a break of 0.8570 retargeting the 0.8620 area. While below the 0.8570 area the risk of a retest of the previous lows at 0.8400 remains. We also have support at 0.8450, trend line from the December lows.
USDJPY – last week’s rally fizzled out at the 112.20 area before sliding back below 111.60. This keeps the prospect of a move back towards the 110.00 area on the table. Only above 112.50 the risk of a move back towards the 110.00, as well as the 108.50 area diminishes.
FTSE100 is expected to open 12 points higher at 7,294
DAX is expected to open unchanged at 12,257
CAC40 is expected to open unchanged at 5,085
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