London markets look set to play catch-up this morning after a positive European session yesterday in what looks set to be a big week for financial markets, where the focus is set to be on the UK election, Greece and the latest US payrolls report.
Asia markets have undergone a somewhat turbulent session as the easing party continued overnight, this time with the RBA cutting interest rates for the second time this year by 25 basis points to another record low of 2%, as the central banks attempts to mitigate concerns that a weakening Chinese economy will continue to weigh on the Australian economy, and its exports.
The biggest concerns remaining around frothy house prices, but this doesn’t appear to have deterred the RBA as it becomes the latest in a long line of central banks to push back against a tide of falling inflation and slowing economic activity.
The FTSE100 looks set to climb back above the 7,000 level this morning after some slightly underwhelming manufacturing PMI data yesterday from Germany, France, Italy and Spain. While the German, Italian and Spanish numbers came in on the broadly positive side, it was France once again that continues to show no significant sign of getting any type of positive boost, either from the lower euro, or the oil price.
Given that oil prices appear to have bottomed out, the risk is that the French economy may have missed the economic sweet spot that both of these factors have provided in the past few months.
France wasn’t alone in seeing a disappointing performance in the manufacturing sector in April, an eleventh successive monthly decline, it was also joined by Greece, which also posted a contraction in economic activity, but at least Greece has an excuse, given the uncertainty surrounding its current fiscal situation.
Unsurprisingly there was little in the way of progress over the weekend with respect to Greece’s fiscal situation as discussions continue over a new list of reforms with the Greek Deputy PM due to meet ECB President Mario Draghi this evening.
The IMF also fired a shot across EU creditors bows yesterday by saying that they might have to consider some form of debt relief towards Greece, which they are currently strongly opposed to.
It has been increasingly clear for some months now to pretty much everyone, except EU creditors, that some form of debt relief is going to have to occur for Greece’s debt to become sustainable again. The problem, as with most things in Europe will be political, and it is likely to be toxic politically, especially if that is the price for yet another bailout.
The pound has taken a bit of a hit in the last day or so after a disappointing April manufacturing PMI number on Friday, saw the indicator hit a seven month low. This could well just be a little bit of a pre-election uncertainty as businesses delay investment decision’s ahead of this week’s vote, but it is nonetheless worrying as we get closer to this week’s vote.
The latest construction PMI number for April is also expected to see a little bit of a slowdown, slipping back to 57.6 from 57.8.
In the US the weakness in the most recent economic data continued last Friday with a disappointing ISM manufacturing number for April. While this week’s focus is one Friday’s employment report we also have the latest trade balance numbers for March due today, as well as the latest services ISM data for April.
The March trade report is expected to see the deficit widen to -$41.3bn from -$35.4bn, while the services sector is expected to slip back slightly from 56.5 in March to 56.2.
In a sign that some members of the FOMC are starting to become a little concerned at the weakness of the US economy, the head of the Chicago Fed Charles Evans, a renowned dove, suggested that the Federal Reserve might be better to hold off on normalising monetary policy until early next year. His reasoning appears to be that the risks of doing nothing are outweighed by the risks of acting too soon and jeopardising a fragile recovery.
EURUSD – the euro posted its first positive month since June last year, reversing all of March’s losses in the process. This strong performance suggests we could well see a move towards 1.1500 in the coming weeks. The recent rebound appears to have found some resistance at the 100 day MA but as long as we don’t drop back below 1.1050 then the bias remains for further gains.
GBPUSD – a strong April performance for the pound as well which augurs well for further gains on a move through 1.5500. Having failed at 1.5500 last week we could slip back towards the 1.5000 level after dropping back below the 100 day MA on Friday. We need to get back above 1.5200 to stabilise.
EURGBP – the euro had one of its best weeks in a long time last week, hitting 0.7418, a two month high before slipping back yesterday. Having taken out the March and April highs at 0.7385 the bias has shifted towards further gains. A break above 0.7420 could argue for a move towards 0.7540. Any pullbacks need to find support at the 0.7325 area for this to play out.
USDJPY – strong support remains just above the March lows at 118.30, while at the same time the rebounds keep getting shallower. We need to see a break above 120.20 to mitigate the downside risk of a move towards 116.50.
Equity market calls
FTSE100 is expected to open 46 points higher at 7,032
DAX is expected to open 16 points lower at 11,603
CAC40 is expected to open 5 points lower at 5,077
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