Last week was a particularly mixed one for equity markets in the US and Europe with both the Dow 30 and S&P 500 finishing lower on the week, while Europe fared marginally better with the DAX and FTSE 100 finishing the week higher, with both indexes making new multi-year highs.
The contrast in performance didn’t stop there though as the French CAC 40 slipped back while the FTSE MIB in Italy slid to two month lows before recovering some ground on Friday.
The primary reason for the mixed performance was some unexpectedly weak Q1 GDP numbers from across the euro area, with the notable exception of Germany.
Given some of the recent economic data from across the region in the past few months there had been an expectation that last week’s numbers should have been much better than they actually were.
This complacency on the part of investors about the strength of the recovery in Europe appears to have prompted a reassessment of some of their risk weightings, prompting a slide in German, UK and US bond yields to multi month lows, as money flowed into bond markets.
That being said, equity markets still remain near multi year, and in some cases all-time highs, despite this rally in safer government bond prices, and European markets look set to open slightly higher this morning, with the main focus in the UK likely to be back on the pharmaceutical sector after US pharmaceutical giant Pfizer Inc (LONDON:PFZ) came back and submitted a new final £55 a share offer for Astrazeneca Plc (LONDON:AZN). Initial indications suggest this offer could also be rejected.
Banks are also likely to in the spotlight after Deutsche Bank AG NA O.N. (NYSE:DB) announced that it would be looking to raise up to €8bn in order to boost its capital ratios as a host of European banks look to take steps to boost their balance sheets as part of the ECB’s asset quality review. Up to €1.75bn is set to come from the Qatari investment fund.
This action by Deutsche highlights starkly the problems facing Europe’s banks right now as they seek to repair their balance sheets in the aftermath of the recent debt crisis in Europe.
It also makes any action the ECB might take next month that much trickier given that any steps they take to ease monetary policy, particularly an implementation of a negative deposit rate, could actually make it much more difficult for some of Europe’s banks to boost their profits at a time when they are finding it increasingly to do so, as investment banking income continues to fall.
As far as macro events are concerned the main focus comes later in the week with the release of the latest Bank of England minutes which could throw up some unexpected volatility despite last week’s rather dovish commentary from Bank of England governor Mark Carney.
This is because we may well start to see some signs of dissent amongst some MPC members with respect to the timing of a future rate rise. Whether we get that dissent or not, as long as tomorrow’s CPI numbers continue on their recent downward trend then the likelihood of some form of rate hike remains remote, this side of the general election, in a year from now.
Also on the agenda is the latest Federal Reserve meeting minutes for the end of April, with investors expected to look for clues as to whether any on the committee have any concerns about current levels of inflation.
EUR/USD – the euro continues to hold above the 1.3650 level which keeps us within the borders of the double top pattern we talked about last week. A break below 1.3650 is needed to signal the potential completion of a double top reversal pattern and trigger further declines towards the 200 day MA at 1.3620 initially, and then the February lows at 1.3480. We need a move back through 1.3780 to stabilise and retarget 1.3850.
GBP/USD – the pound has managed to rally from last weeks lows at 1.6735 and remains above the next support at the 50 day MA at 1.6725, and trend line support from the November lows at 1.5855. A fall below 1.6700 could well signal further declines towards 1.6625 and the 200 day MA. We need to recover back through 1.6900 to mitigate this scenario.
EUR/GBP – last week’s rally off 0.8128 stalled out at 0.8185, but we really need to break through 0.8200 to signal a base is in. The price action thus far would suggest a move towards 0.8090 on a move through 0.8125. Only a move back through the 0.8200 area hints at a return towards 0.8250, and open up a retest of the 0.8300 area. The 0.8090 level and the 2013 lows remains the next key support.
USD/JPY – continues to look weak with a singular inability to rally off the lows at 101.20, and 200 day MA with any conviction. A move below 101.20 could well see sharp move towards 100.00. We need to see a recovery back through the highs this month at the 102.80 level to suggest a move back to the highs at the beginning of April at 104.10.
Equity market calls
- FTSE100 is expected to open 2 points higher at 6,858
- DAX is expected to open 1 point higher at 9,630
- CAC40 is expected to open 6 points higher at 4,462