After declining for two days in a row, European markets rebounded strongly yesterday, on the back of a combination of an easing of geopolitical tensions, as well as the prospect that the European Central Bank could be about to get even more experimental with monetary policy next week.
There was talk doing the rounds yesterday that ECB policymakers were considering a two tier charging system for banks holding cash at the central bank overnight, with banks who park large amounts getting charged more for the privilege instead of lending it out. This speculation sent the euro sharply lower as well as boosting investor appetite for European stocks at a time when bond yields across the block continue to sink further into negative territory.
With the ECB deposit rate at -0.2%, markets appear to be expecting some significant further easing measures at next week’s meeting if Germany 2-Year bond yields are any guide, given that this week alone they have slid further into negative territory at -0.42%. In a further sign that markets are losing the power of rational thought yields on 2 year Spanish and Italian bond yields also slipped into negative territory, which means that investors are paying the Italian and Spanish governments, those renowned promoters of fiscal probity, to hold their money.
This expectation does create potential for significant disappointment given that certain ECB policymakers seem far from convinced that further measures are necessary. Putting German considerations to one side as it wouldn’t be surprising if they were opposed, there has been other opposition from ECB policymaker Ardo Hansson, Estonia’s representative on the council who said that further measures are not necessary given recent economic data. If markets are expecting shock and awe next week, they could be in for a disappointment.
With US markets winding down for the week yesterday ahead of today’s Thanksgiving holiday, US investors didn’t appear to be in a mood to push their markets strongly one way or the other, despite some by and large positive economic data for the US economy.
While we saw a strong rebound in US durable goods for October, and weekly jobless claims dropped sharply again, but the latest inflation data still showed no signs of turning higher and more worryingly, personal spending for October came in way below expectations, despite personal incomes rising quite strongly.
While it is never wise to read too much into one month’s data personal spending has been weak for the last two months, which means that Black Friday and Cyber Monday are likely to take on much greater importance in terms of the US consumers’ willingness to open their wallets in the lead up to Christmas.
European markets aren’t expected to provide too much in the way of fireworks this morning, with US markets pretty much side-lined until next week, and attention likely to be focussed here in the UK in the aftermath of yesterday’s Autumn Statement.
The Chancellor announced a number of eye catching measures which saw share prices move in the housebuilding and banking sector.
The announcement of an extra 400k new homes and the doubling of the housing budget saw house builders get a nice little boost, but there was a sour taste in the form of a 3% stamp duty levy on second homes and “buy to let” properties. This hit the challenger banks quite hard with Aldermore (L:ALD) Bank, Paragon (L:PARA)and Onesavings (L:OSBO) all dropping sharply given that a good proportion of their business covers the “buy to let” market.
While the pledge to increase state subsidies to private developers, housing associations and local authorities is welcome so that the government can meet its target of 1m new homes by 2020, it does ignore a wider problem which some in the building industry have already highlighted in the last month or so.
The latest RIC’s UK construction survey showed that the industry is facing its biggest skills crisis since 1998, and it is this more than anything else which could well be a headwind to the UK housing sector in the years ahead. With unemployment at multi-year lows and skills shortages unlikely to be plugged quickly, unless by immigration a hot political topic right now, then the ability of house builders to build the houses required is likely to be constrained, not by money, but by head count.
EURUSD – continues to trend lower but has found some support at 1.0570 with the larger support remaining at the March lows at 1.0460. We need to get back through 1.0720 area to argue for a retest of the 1.0820 area. If we do manage to get back above 1.0830 we could see a run at the 1.0980 area.
GBPUSD – the pound continues to look soggy with the prospect we could well retest the previous lows at 1.5025 lows. Major support remains at the 1.4980 area. To stabilise we need to see a push back above the 1.5330 area to encourage the prospect of a move towards 1.5420.
EURGBP – yesterday’s rebound fell back from the 0.7080 level, and we need to overcome this to suggest a rebound towards 0.7150. While below the 0.7080 area the risk remains for a move back to the July lows at 0.6935.
USDJPY – currently finding support above the 122.20 area after last week’s bearish daily reversal, and as long as we stay above here we can’t rule out a return to the 124.00 area, as well as the possibility of a move through to the August highs at 125.30. Only a move below the 121.80 area would delay the prospect of this scenario unfolding.
Equity market calls
FTSE100 is expected to open 10 points higher at 6,345
DAX is expected to open 6 points higher at 11,175
CAC40 is expected to open 7 points higher at 4,900
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