While markets in Europe managed to eke out some gains yesterday the decline in US markets continued after the expected vote on the new health care bill to replace Obamacare was postponed, due to a failure to garner enough support for it.
Nonetheless it looks set to be a disappointing week for stock markets on both sides of the Atlantic as a semblance of realism starts to creep into proceedings in terms of what the new US administration will be able to deliver in terms of its reform program in the coming weeks and months.
Promises of action are all well and good but unfortunately President Trump’s words are now coming up against the realities of Washington politics, where things move much more slowly than he is probably used to when it comes to business.
It also means that investors will have to readjust their expectations in terms of administration deliverables and timetables in terms of banking and tax reform as the promise of a speedy turnaround in a new health care bill is likely to take longer than anticipated.
Oil prices are also continuing to act as a drag on equity markets as rising US shale output threatens to offset the potential for OPEC cuts to make any inroads at all to the current overcapacity in the market.
Having spent most of the last three months treading water in a fairly tight range it would appear that a long oil market, rising rig counts, and an inability to push higher has seen a rush for the exits with the potential for oil prices to fall at least another $3-$4 in the coming days.
Yesterday’s rebound in European markets was helped in some part by a decent performance from the retail sector after UK retail sales rebounded strongly in February, rising 1.4%, well above expectations.
Some of this recovery was no doubt a bounce back after poor December and January numbers, but nonetheless the overall resilience of the UK consumer last month caught most people by surprise. Even the latest CBI retail sales numbers for March showed a much more positive outlook than most estimates, which augurs well for a better than expected end to the quarter.
Despite this silver lining there was still a cloud as price pressures showed that inflation was likely to act as a brake on consumption in future months. It still seems likely that the UK economy will show a slower rate of economic growth in Q1; however this was always inevitable after such a strong showing in the second half of last year.
Pessimism around the future direction of the UK economy and the pound remains high despite recent economic data showing a decent level of economic activity as we come close to the end of Q1.
Incessant talk of the pound hitting $1.06 against the US dollar seems more designed to grab headlines than having any basis in reality at this point in time.
On the data front today we get to see whether the recent economic recovery in France and Germany has maintained its traction from January and February, with the latest flash PMI’s for March in the manufacturing and services sectors.
France in particular saw a strong performance in the services sector in February, and this looks like it could well be sustained in March with only a slight slowdown expected to 56.2 from 56.4. Manufacturing remains a slight laggard, but is still expected to come in at 52.4.
German activity is expected to show similarly steady numbers of 56.6 for manufacturing and 54.5 for services.
EURUSD – key resistance remains in and around the 1.0830/40 area, with the 200 day MA also coming into view at 1.0945 on a break of 1.0850. Pullbacks need to hold above 1.0680 for a test of the 200 day MA to pan out.
GBPUSD – the pound continues to edge higher pushing above 1.2500 with the potential to close in on the February highs above the 1.2700 area, where we also have the 200 day MA. Intraday support comes in at the 1.2380 area.
EURGBP – continues to drift lower and looks set for a retest of the 0.8580 area in the short term. We have trend line resistance from the 14th March highs at 0.8785 coming in just above the 0.8710 area. Above 0.8730 we could head back towards the highs at the 0.8800 area.
USDJPY – the US dollar continues to decline, breaking down towards and finding support near 110.60. The 111.60 should now act as resistance on any pullbacks, with further resistance up near 112.50. The short term bias has shifted towards the 110.20 area and potentially 108.50.
FTSE100 is expected to open 8 points higher at 7,348
DAX is expected to open 19 points higher at 12,058
CAC40 is expected to open 2 points higher at 5,032
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