It was another day of records yesterday with global stock markets continuing to make new multi-year highs with the Japanese Nikkei 225 hitting its highest close since 1996.
US markets once again continued their almost weekly ritual of making new record highs, this time in the wake of last nights Fed minutes which showed that, barring a significant change in the economic outlook, another rate rise by year end would be warranted.
The September minutes didn’t really add anything new to what we already knew, and recent data certainly hasn’t done anything to undermine the premise of another rate increase. Last week’s payrolls data may have been disappointing but another decline in the unemployment rate to 4.2%, as well as a sharp jump in wages pressure certainly don’t diminish the case for a rate rise by the end of the year.
That being said it is hard to determine as to whether these numbers were skewed as a result of the US hurricane season, and while it is true that some Fed members do have concerns about low levels of inflation given yesterday’s comments from Chicago Fed President Charles Evans, it would appear that he could be in the minority with perhaps the exception of the head of the Minneapolis Fed, Neel Kashkari, which means further rate hikes beyond the end of this year is harder to gauge.
The reaction in the US dollar was certainly telling in that it barely budged in response to the minutes, driven as it is for the moment on the back of waning optimism about significant tax reform in the wake of the ongoing spat between President Trump and Senate Republican Bob Corker.
When you have a wafer thin majority in the house and you want to pass any sort of reform legislation it generally pays not to upset influential policymakers on your own side, yet for whatever reason the President can’t seem to help himself in taking pot-shots at the very people he needs to get his policies through.
Back in Europe we saw a modest recovery in the Spanish stock market yesterday in the wake of the Catalan President’s ambiguity over the timing of a possible independence announcement, though we still remain well short of the highs seen last month. Despite the rally from the lows last week of 9,870 Spanish stocks still remain in the downtrend they have been in since they peaked in early May.
The response of the Madrid government to the Catalan President appears to be designed to flush out the actual position of the Catalan government on this issue before they move forward with the nuclear option of triggering article 155 of the Spanish constitution and in so doing impose direct rule from Madrid.
Prime Minister Rajoy’s response in asking for clarity appears to be designed to concentrate the minds of the more moderate members of the Catalan government, and the five day deadline would seem to be designed to address this as the Spanish government awaits a response.
While the deliberate ambiguity of Catalan President Puigdemont was probably designed to increase the pressure on the Spanish government, all it has succeeded in doing is sow divisions on his own side and increase the pressure on him to jump one way or the other. If he backs down he risks the collapse of his government, and if he doesn’t he risks an escalation from Madrid.
A unilateral confirmation of independence would in all probability prompt a triggering of article 155 and an escalation of the crisis to a whole new level to a point where new elections might be needed not only in Madrid, but also in Catalonia. Whatever happens over the next few weeks relations between Madrid and Barcelona have opened up a chasm that is going to take some time to repair, and if it transpires that article 155 does get triggered, nobody will win.
EURUSD – last week’s rebound off the 1.1670 area, could prompt further gains towards the 1.1920 level in the short term, by way of the 50 day MA at 1.1850, with the potential for a return to the 1.2000 level. A move below 1.1670 argues for a move towards 1.1570.
GBPUSD – the rebound off the 1.3020 area last week needs to recover through the 1.3320 area to signal a retest of the 1.3420 area. We still remain in the broader uptrend while above the 1.3000 level and a return to the highs last month.
EURGBP – continues to struggle below the 0.9000 area and the 50 day MA at 0.9020. We now have support back at the 0.8900 area and below that at the 0.8820 area.
USDJPY – last week’s failure at the 113.40 area has seen the US dollar slip back though it did find some support just below the 112.00 area. The risk remains for a move back to 114.00, though we might see a dip to 111.30 first.
FTSE100 is expected to open 5 points lower at 7,529
DAX is expected to open 5 points higher at 12,975
CAC40 is expected to open unchanged at 5,362
IBEX is expected to open 10 points higher at 10,288
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