European equity markets finished lower yesterday as dealers were worried about the global economy. It was a quiet day in terms of new macro-economic news, but traders were still worried by the underwhelming data from China, and the disappointing reports from France and Germany that were released on Friday.
The negative stories have been stacking up recently, and investors are finding it difficult to be optimistic.
US stocks sold-off yesterday as dealers were concerned about the world economy, and there is also a fear the Federal Reserve are tightening their monetary policy too fast. The S&P 500 fell to a new 2018 low, while the Russell 2000 entered a bear market. Asian equity markets sold-off overnight on the back of the negative move on Wall Street. China’s Xi Jinping said the country should ‘stay the course’ in relation to economic reform.
ASOS (LON:ASOS), the London-listed online fashion house revealed a profit warning yesterday, and it weighed on the entire sector. The company has a major competitive advantage over its high street rivals as its overheads are far smaller, and even though it has been cutting prices, it still struggled to attract buyers.
In recent weeks and months we have heard downbeat updates, from Sports Direct (LON:SPD), Ted Baker (LON:TED) and Primark. We you take into consideration that UK average wage growth hit a 10 year high, and inflation is in decline, the updates from retailer are disappointing.
Demand is weak in the eurozone too as the headline CPI figure cooled to 1.9% -a six month low. The reading which strips out energy and food, dropped back to 1% from 1.1%, and that highlights the softening of demand. The currency bloc has been undergoing a decline in economic activity recently, and the inflation figures hammer home the point.
The German IFO business climate will be announced at 9am (UK time) and the consensus estimate is 101.7, which would be a decrease from the 102 in November. Keep in mind the 101.7 reading in July, was the lowest in over six years.
There was additional negative news from the UK housing market yesterday. According to Rightmove, average asking prices dipped by 1.5% in the four weeks until December. On an annual basis, prices edged up by 0.7%, but London prices fell by 1.1%. This update adds weight to the argument the UK housing market is cooling.
The US National Home Builders Association market index dropped from 60 to 56 – its lowest reading since May 2015. The US housing market has been under pressure recently as prices have become overstretched and the prospect of higher interest rates is a factor too.
According to FedWatch, there is a 73.5% chance of a 0.25% interest rate hike this week, and should it be delivered, it is likely to keep pressure on the housing market. At 1.30pm (UK time), the latest building permits and housing starts will be released, and the consensus estimate is 1.26 million and 1.23 million respectively.
Yesterday, Prime Minister May, said the UK will vote on the Brexit deal in the week beginning 14 January. The vote was supposed to be held last week, but the Prime Minister backed down knowing she would lose. Mrs May claims there will be no hard border on the island of Ireland, and she hope to secure extra ‘political and legal assurances’ in the near-term. The UK is due to leave the EU in late March 2019, and some traders are afraid there will be an accidental no-deal Brexit.
EUR/USD – has been diving lower since late September and if it holds below the 1.1510/00 region, it could pave the way for the 1.1215 area to be retested. A move to the upside could run into resistance at 1.1493 – the 100-day moving average.
GBP/USD – bullish engulfing might see a move back towards the 1.2750 region. Another move lower might bring 1.2365 into play.
EUR/GBP – the bearish engulfing might drive the market to the 200-day moving average at 0.8840. If the wider rally continues, it might target 0.9100.
USD/JPY – the upward trend that began in March is still intact, and if the positive move continues it might target 114.73. Support might be found at 112.39 – 100-day moving average.
FTSE 100 is expected to open 55 points lower at 6,718
DAX is expected to open 67 points lower at 10,705
CAC 40 is expected to open 29 points lower at 4,770
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