Despite Friday’s strong rebound on the back of a much better than expected US June jobs report, European markets still finished the week lower, as concerns over the resilience of the banking sector, particularly in Italy kept investors somewhat cautious.
Asia markets took their cues from Friday’s US numbers as well as a decisive win by Japanese Prime Minister Shinzo Abe in upper house elections at the weekend, which some have hoped will make it much easier to implement new reforms and a stimulus package in order to revive the stuttering Japanese economy.
While the FTSE100 finished the week higher, and is now higher than it was before last month’s referendum, it was still a disappointing week for banks, house builders and commercial real estate sectors. These sectors are likely to remain a cause for concern as worries over a slide in property prices and construction activity continue in the wake of last month’s Brexit vote.
Even though Friday’s jobs report sent the S&P500 to its highest ever closing level the fact remains that June’s payrolls report only posed more questions rather than any additional answers. If markets thought that the May report was an outlier at 11k new jobs, what should they make of a number that was within 8k jobs of being the best month of job gains since October last year at 287k, is that an outlier as well?
When such sharp anomalies take place in such a short space of time it sometimes pays to take a slightly longer view to see what the longer trend is, which currently gives us a three month average of just below 150k and a slightly more accurate outlook. Nonetheless given the publication of last week’s minutes the FOMC appear divided on how well the US economy is performing, particularly since wage rises still appear to be on the low side.
Bond markets appear to have made up their minds about the potential for a rate rise as long term US treasury yields closed near record lows.
Knowing all of this it remains highly unlikely the Fed will feel confident enough about the economic outlook to consider raising rates between now and the US Presidential elections in November.
Looking ahead to this week, investor’s main focus is likely to shift to the latest Chinese economic data, at a time when the yuan has slid back its weakest levels this year, raising concerns in some quarters about how well the Chinese economy is actually doing.
We also get to see the beginning of US earnings season which looks set to point to further declines in the pace of US companies profit growth, with banks likely to be a particular concern at a time of continued erosion of their interest rate margins.
The pound is likely to face a major test later this week when the Bank of England monetary policy rate setting committee meets for the first time since last month’s UK referendum, and where most people expect a reduction in the base rate from 0.5% to a new record low of 0.25%, at the very least.
EUR/USD – still doing nothing as the euro continues to struggle with the bias remaining towards a move towards the March lows at 1.0825. To stabilise we need to see a move back above the 1.1250 area.
GBP/USD – the failure thus far to push back above the 1.3050 level, keeps open the bear flag towards the 1.2000 level which would only be negated with a move back through 1.3150. Support currently at 1.2800 with a break lower targeting the 1.2500 area initially.
EUR/GBP – while above the 0.8410 area the euro looks set for a move to the 0.8706 area, 61.8% retracement of the big down move from 0.9805/0.6535. A move back below the 0.8400 area would delay this outcome.
USD/JPY – has thus far held above the 100 level but while below the 103.50 area the risk remains for a return to the previous lows at 98.95. A move below 100.00 is likely to prompt the risk of further losses and possible BoJ intervention concerns.
Equity market calls
FTSE100 is expected to open 24 points higher at 6,614
DAX is expected to open 94 points higher at 9,723
CAC40 is expected to open 27 points higher at 4,217
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