Equity markets continued to remain fairly resilient yesterday with the FTSE100 enjoying its first positive day since last Wednesday, as banking stocks continued their recent run of gains, while oil and gas stocks also rebounded on the back of a strong rebound in the crude price.
Reports that OPEC members were due to meet in Doha this Friday to try and get an agreement on a production freeze or cap triggered a wave of short covering after several days of declines, and also helped pull US markets collectively higher, with the Dow once again posting a new record close.
Despite a lower euro, European equities have continued to struggle, albeit near their recent range highs, but appear to lack the conviction to break higher with any confidence for now, though we still look set for a positive open when equity markets open later this morning.
US markets continued to remain resilient helped by yesterday’s rebound in oil prices as well as more evidence that the US economy appears to be starting to improve in Q4. Yesterday’s retail sales showed a strong rebound in October, rising 0.8%, boosting the case for a rate rise next month even further as expectations of a move in December rose to 94%, suggesting a move is more or less a done deal, as far as markets are concerned.
The resultant move in the US dollar has pushed the US dollar index back close to levels last seen at the end of last year after the Fed raised rates for the first time in nine years, and it looks increasingly likely that we’ll see a similar move in about a months’ time and more Fed officials break cover to make the case for a move, the latest being the Dallas Fed President Robert Kaplan.
Bond markets enjoyed a bit of a respite after several days of selling with yields falling back from their recent peaks, as UK inflation softened slightly in October, while German Q3 GDP came in slightly softer than expected.
Yesterday’s headline CPI inflation numbers came in as somewhat of a surprise slipping back to 0.9% in October, from 1% in September. The bulk of the decline came in clothing and food prices while retail prices also held steady at 2%, which in turn served to push the pound back from its recent highs.
This decline in the pound, while reinforcing the case for lower rates, rather misses the point given that this pause in rising inflation is unlikely to be sustained in the longer term.
Traders appear to be ignoring the fact that input prices, which always come with a lag, once again showed a sharp increase in October rising above expectations to 12.2% on an annualised basis, while the month on month number rose by 4.6%, the highest monthly rise since records began.
A rise of this magnitude is likely to start to feed through into the headline number sometime at the beginning of next year as retailers hold back any price rises ahead of the Christmas shopping season, in an attempt to get their pre-Christmas sales numbers up.
It can certainly be argued that retailers may be likely to accept some margin shrinkage in the next few weeks in the lead up to Christmas, but they are unlikely to be able to sustain this sort of shrinkage in the longer term.
This would suggest that the wages data due today and in the coming months will be even more important to ensure that the effects of any future income squeeze remains as benign as possible.
Average earnings for the three months to September is expected to come in unchanged at 2.3%, while the latest ILO unemployment rate is expected to remain unchanged at 4.9%, as the UK economy continues to confound all those critics who expected a post Brexit vote slump.
EUR/USD – the euro has continued to slide towards the 1.0700 level, and trend line support from the all-time lows at 0.8200. A break here has the potential to open up the previous lows at 1.0460 from last year. We would need to see a recovery back through 1.0830 and then the 1.0950 area to stabilise.
GBP/USD – the pound hit a high of 1.2670 level last week but has slipped back finding support at the 1.2380 level. The prospect of further gains towards 1.2880 remains a possibility, while above these lows. Only a move through 1.2330 opens up the potential to revisit the recent lows near the 1.2100 area.
EUR/GBP – last week’s decline through the 0.8780 area to the 0.8565 area has the potential to extend even further towards 0.8380 in the short term. For this to unfold the euro needs to stay below the 0.8780 area in the short term.
USD/JPY – the US dollar continues to extend beyond the 200 day MA and looks set for further gains towards the 110.00 level. The move through 106.80 appears to have been the catalyst here and this should now act as support.
FTSE100 is expected to open 23 points higher at 6,815
DAX is expected to open 35 points higher at 10,770
CAC40 is expected to open 15 points higher at 4,551