While we saw another positive week for broader European markets last week, some of the declines seen on Friday did take some of the shine off, with the FTSE100 underperforming, finishing lower for the first time in four weeks, despite another really strong week for oil prices, the third in succession.
The continued rise in the oil price would appear to suggest that investors are making an assumption that the supply glut is on its way to becoming worked off and that prices could be set for another leg higher.
While this may seem a reasonable assumption, caution remains warranted on the basis of the fundamentals given the oil market remains oversupplied as some in the market look to pick the top on a market that has already rebounded over 60% from its recent lows. While this seems a sensible strategy it remains fraught with danger given the significant cuts to US capacity already seen in the last twelve months, along with the continued weakness of the US dollar against the both the Reuters CRB and Bloomberg Commodities index, both of which are trading at their highest levels this year.
Add in the fact that this renewed resilience in sentiment has brought about some significant technical break outs for both crude oil and copper and that central banks around the world appear to be slightly more co-ordinated in terms of their overall policy intentions, and it is hard to believe that just over two months ago we were trading at multi year lows.
As well look ahead to this week attention now shifts away from the European Central Bank, towards the latest US Federal Reserve and Bank of Japan rate meetings on Wednesday and Thursday respectively.
With US Q1 GDP expected to come in at the low end of expectations later this week, there remains little chance of any move on rates in the short term, with markets only assigning a less than 20% chance of a move on rates at the June meeting, despite continued jawboning from some Fed officials that we could see as many as two or three by the end of the year.
The main attention is likely to be fixed on the Bank of Japan meeting on Thursday after last week’s reports that the central bank might extend its negative rate policy further by adopting a policy of a negative rates on loans. In other words paying banks to encourage them to lend money. This sounds very similar to the measures announced earlier in March by the ECB and the negative rate TLTRO’s due to start in June.
Given that the announcement of similar measures by the ECB in March saw the euro go up, it remains to be seen whether similar Bank of Japan measures would be successful, if anything it’s been notable that most central banks who have announced negative rates have been unsuccessful in weakening their currencies or promoting significant additional loan growth.
In fact speculation about further monetary policy measures has seen the topic of “helicopter money” start to get more frequent mentions in the financial press, so much so that Bank of Japan governor Kuroda was forced to deny that it was even being considered.
Unfortunately for him he said something similar just prior to moving rates into negative territory, earlier this year, which means his words now carry less weight then they used to.
On the data front today we have the latest German IFO survey for April which is expected to show a similar improvement to the one we saw in last week’s ZEW survey. Expectations are for an improvement to 107.1 from 106.7, as German companies look to shrug off the earlier concerns at the beginning of the year.
The pound was among one of the best performing currencies last week and has continued to rally this morning against the US dollar and euro as markets perceive that the recent intervention by US President Obama, as well as his possible successor Hillary Clinton has shifted the odds towards the “Stay “ camp in the latest polling indicators, dealing a blow to “Brexit” campaigners.
EUR/USD – having failed to push through the recent highs at 1.1440 we’ve slipped back below 1.1250 and could well slip back towards the 1.1140 area, the lows at the end of March. A move through here could well see a move back towards the 1.1030 area, with support also towards 1.0800.
GBP/USD – having closed at its highest level in five weeks the pound needs to push through the 100 day MA to target a potential move towards the 1.5000 level. Dips continue to be well supported with support currently at the 1.4300 level.
EUR/GBP – the weekly bearish engulfing pattern two weeks ago has seen the euro slide through the 0.7820 level closing back below the 200 week MA and targeting a potential further decline towards 0.7690 initially. Resistance now comes in at the 0.7820 level as well as 0.7860.
USD/JPY – and unexpected break back through the 110.20 area has also seen a rally through the 111.00 area, which could well extend towards 112.75 and potential 113.50. We need to see a move back below 110.50 to reinitiate recent downside momentum.
Equity market calls
FTSE100 is expected to open 7 points lower at 6,303
DAX is expected to open unchanged at 10,373
CAC40 is expected to open unchanged at 4,569
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