They say “still waters run deep” and the same could be said of stock markets in the past few weeks, as volatility hits multi year lows, volumes languish in the doldrums, and European bond yields fall near to, and in some cases, trade at record lows, against a backdrop of central banks determined to keep interest rates low, and liquidity ample.
These new “Masters of the Universe” have helped continue to push global stock markets to new records yesterday with the German DAX closing above the 10,000 level for the first time ever, while in the US the Dow 30 and S&P 500 continued to set new records on the back of a fairly ordinary set of US employment numbers last week.
This has helped maintain the predominantly positive tone, with the S&P500 closing above 1,950, bringing it ever closer to another psychologically important round number, the 2,000 level, while the Dow looks to close in on 17,000. Given the prevailing sentiment it remains difficult to imagine what the catalyst would be to prompt any sort of sharp downward correction.
Given all of this, it is hard to escape the feeling of an eerie calm before the onset of a possible storm, and this apprehension certainly goes some way to accounting for some of the caution creeping into the markets, and this caution is likely to account for a slightly lower European open this morning.
While stock markets have reacted well to last week’s ECB measures, the reaction of the currency markets has been much more telling, with the euro initially dropping sharply before rebounding just as quickly, on the basis that these ECB measures aren’t likely to take effect much before September, at the earliest.
As monetary policy moves into the realms of the experimental in Europe, it is hard to imagine that the €400bn worth of so called TLTRO’s, will be any more successful in kick starting lending, than the much bigger €2trn worth of LTRO’s that the ECB tried and failed with over the past three years, particularly with growth remaining so tepid and unemployment still high, and more importantly, loan demand continuing to remain low.
Investors did take comfort from yesterday’s Japanese extremely good Q1 GDP data, as well as Chinese trade data for May, which showed a rise in exports, suggesting that global demand is starting to pick up, though this improvement might well have more to do with the fact that the recent declines in the Yuan have made Chinese exports cheaper.
Scratch a little below the surface and imports paint a rather different story, showing continued weakness in Chinese domestic demand, against a backdrop of concerns about China’s domestic economy and property sector. This doesn’t bode well for a country determined to rebalance its economy away from exports, and towards domestic consumption.
The Chinese central bank did relax some of its reserve requirements to smaller banks yesterday in an effort to boost lending to small businesses, but its room for manoeuvre remains limited, despite CPI inflation remaining muted at 2.5%, and producer prices at -1.4%.
With little in the way of other economic data today the focus is set to return to the UK economy this morning with the latest industrial and manufacturing production data for April.
Given that this data is the first official Q2 data from the ONS with respect to this sector, it could knock some shine off the recent good economic readings we’ve seen in the recent PMI data. Expectations are for a decent start to Q2 with a 0.4% rise in both measures.
The retail sales data from the BRC released overnight for May showed a slowdown from the 4.2% rise in April, but nonetheless stayed positive at 0.5%.
EUR/USD – last week’s price action saw the euro rebound sharply from near the support and the lows this year just above 1.3480 at 1.3503. Below the lows this year we also have key trend support from the 2012 lows at 1.2045, which now comes in just above 1.3440. We currently have some support at 1.3580, and we need to stay above this to argue for a move back towards 1.3675, with a break above targeting the 1.3780 level.
GBP/USD – the pound continues to remain resilient, staying above support just below 1.6700, as well as the 100 day MA; however it currently remains stuck below trend line resistance at 1.6840 from the highs this year at 1.6998. A break through here could well retarget the 1.6920 area, and then the 1.7000 level.
EUR/GBP – last week’s rebound from an 18 month low at 0.8064 may well have caught out a few short positions, but while we remain below trend line resistance from the March highs sitting just below the 0.8150 level, the risk remains for further declines, with a first target at 0.8035.
USD/JPY – the range trade appears to be the order of the day for now with resistance anywhere below the 103.00 area and support near 101.00. The risk remains for a move back towards 101.80 while below last week’s high at 102.75.
Equity market calls
FTSE 100 is expected to open 17 points lower at 6,858
DAX is expected to open 11 points lower at 9,998
CAC 40 is expected to open 2 points lower at 4,587
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