While Friday’s shocking events in Paris acted as a little bit of a cloud on European markets yesterday, the negative reaction was largely confined to the travel and leisure sector and some retail stocks, as investors worried about the possible effects to consumer confidence and spending in the lead-up to Christmas.
US stocks on the other hand, coming off their worst weekly performance since August, rebounded strongly, helped by a technical rebound in oil prices, which had seen declines for eight days in a row, rebounding sharply after failing to break below $40 a barrel.
The decision by French President Francois Hollande to push for a three month extension to the state of emergency effectively suspending Shengen, certainly has the potential to impact on sentiment, particularly at a time when there is some concern about the resilience of the European economy let alone the French economy, but for now it appears that markets are parking those concerns.
These concerns about sentiment are likely to be front of mind for the European Central Bank in the coming weeks as it weighs up the prospects for further stimulus at its next meeting in December, and as such could help explain the fairly sanguine market reaction yesterday, as well as today’s positive European open.
The big unknown going forward remains as to whether security services across Europe are able to foil further terrorist outrages, and whether IS are able to follow through on their threats of more.
Yesterday we saw the latest EU CPI numbers tick up slightly from 0% to 0.1%, which was a little unexpected given last week’s disappointing economic data and the overwhelming narrative coming from ECB officials suggesting that we could be in line to see further easing at next month’s rate meeting in early December.
The latest German ZEW economic expectations survey for November is expected to see a slight improvement on the recent decline to 1.9 in October, which was a one year low. An improvement to 6.7 is expected, but given last week’s sharp declines in the DAX this could well disappoint.
The focus on inflation, or rather the lack of it, shifts back to the UK and the US today and it is this lack of inflation that could well prompt a change of expectation on the part of the US Federal Reserve in the context of a possible rise in rates next month.
As for the UK the outlook for inflation still remains subdued, with an expectation that year-on-year CPI will remain in negative territory at -0.1%. This weakness is likely to be driven by energy and food prices which remain below the levels seen last year.
As far as retail prices are concerned, these could well tick up to 0.9% from 0.8%. Prices in the supply chain are expected to show that factory input prices fell 12%.
US CPI inflation for October will also be in focus today with expectations that we could see a tick higher from 0% in September to 0.1%. This number could well go negative given the sharp declines seen in energy prices from a year ago, with gasoline, natural gas and oil prices all down by over 40%, year on year.
Core prices are expected to show a rise of 1.9%, unchanged from a year ago.
US industrial and manufacturing production for October is expected to rebound from the declines seen in September with increases of 0.1% expected.
EURUSD – having failed last week at 1.0820 the euro continues to look soft with the possibility of a retest of the March lows at 1.0460 very much on the cards. If we do manage to get back above 1.0830 we could see a run at the 1.0980 area.
GBPUSD – the pound continues to look a little soggy despite a rebound to 1.5270 late last week. A move back below 1.5160 suggests a retest of the lows last week at 1.5027, with major support at the 1.4980 area. Above the 1.5300 area retargets 1.5360.
EURGBP – yesterday’s slide below the 0.7040 area negates the prospect of a rebound in the short term with the prospect of a move back towards the 0.6935 area and July lows. Interim resistance can be found at the 0.7080 area, and behind that at 0.7160.
USDJPY – yesterday’s rebound from the 122.20 area keeps the prospect for a move towards the 124.00 level as well as the possibility of a move through to the August highs at 125.30. Only a move below the 121.80 area would delay the prospect of this scenario unfolding.
Equity market calls
FTSE100 is expected to open 99 points higher at 6,245
DAX is expected to open 127 points higher at 10,840
CAC40 is expected to open 71 points higher at 4,875
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