Another negative day for European markets yesterday was again largely driven by heavy declines in the oil price, after comments from the Saudi Arabian oil minister about the unlikelihood of any production cuts saw oil prices continue to swing wildly within their recent price range.
A late rebound in US trading saw US markets reverse their losses as oil prices once again struggled to sustain a move below $30 a barrel.
This rebound is likely to see European markets open strongly higher this morning.
In a rather strange twist of fate one of the best performing economy’s in Europe over the past 12 months has found its currency take an absolute hammering in the past few weeks as investors take a rather one eyed and alarmist perspective on the potential negative consequences of a British exit from the EU in a referendum vote scheduled for June this year.
This presumes a rather binary outcome of any potential economic damage a leave vote could do to the UK economy, and presumes rather naively that Europe would be completely undamaged by such an event.
Given some of the weakness of recent data from the Italian, French and other European economies this would almost be laughable, if it weren’t for the almost complete indifference of politicians in Brussels, to the damage being done to the Eurozone economy as a whole, due to the complete policy shambles of the last 5 years.
That wouldn’t be to suggest that everything is well with the UK economy, because that would simply wouldn’t be true, but some of the scenarios being painted yesterday appear to be designed to be grab sensationalist headlines rather than have any basis in fact.
The UK’s contribution is in excess of £12bn and the EU would have to find a way to fill that gap, or cut spending drastically, at a time when most countries throughout Europe are having to tighten their belts and interest rates are in negative territory. This would be a scenario which you would have thought both sides would want to avoid, and thus prompt some significant urgency on the part of both parties, rather than the scaremongering tactics that we’re getting already, and there’s still four months to go until the vote.
Later this morning we get the latest iteration of UK Q4 GDP and expectations are for growth of 0.5%, unchanged from the previous reading, and an annualised number of 1.9%, though we could see some evidence that business investment is starting to slow from the previous 2.2% to 0.6%, though the annualised measure is expected to increase to 6.4% from 5.8%.
While investors clobber the pound over “Brexit” concerns the latest EU CPI numbers look set to reveal that annualised inflation is starting to pick up in January to 0.4% from 0.2% previously, with core prices remaining steady at 1%. Will this move the dial on whether to expect further stimulus measures next month when the ECB meets is hard to say given that ECB President Mario Draghi has already indicated that the ECB will act? The main question remains on what they will do with interest rates, and/or additional QE. The ECB can ill afford to disappoint the markets again when they meet again next month.
The US economy continues to show worrying signs of weakness, particularly in the manufacturing sector which yesterday saw another weak reading, this time from the Markit Services flash PMI, dropping to 49.8 in February. Services had, until recently been performing well so this came as a real surprise, and doesn’t bode well for next week’s ISM numbers.
Today we get the latest durable goods numbers for January and after the plunge in December, hopes are being pinned on a strong bounce back. These hopes could be in vain even allowing for increased aircraft orders, while expectations excluding transports is still only expected to show a rise of 0.2%, up from a 1% decline in December.
In short it is likely that we get a number that pushes US rate rise expectations further out.
EUR/USD – having broken below the 200 day MA at 1.1050 the bias has shifted for a move lower and a test of trend line support from the lows in December, which comes in at the 1.0925 level. A break of this support would open up the 1.0700 area. A recovery through 1.1070 argues for a move back to 1.1200.
GBP/USD – this week’s drop below the 1.4220/30 and the previous low at 1.4080 increases the risk for a move towards the 2009 low at 1.3500. A monthly close below 1.4100 would also be the lowest close in over 30 years since the pound rebounded from its all-time lows at 1.0500 that same year. We need to see a recovery back through 1.4090 to stabilise.
EUR/GBP – continues to push higher against expectation towards the 200 week MA which is the key resistance on the upside at 0.7945. A weekly close through here could well see further gains towards 0.8100. Support lies all the way back near the 0.7720 area.
USD/JPY – the US dollar appears to be finding support around the 111.00 area for now, but the technical break of 116.00 is a key indicator that we could see a larger move lower to 106.00 in the longer term. For this risk to diminish we would need to see a strong recovery back through the 116.00 area.
Equity market calls
FTSE100 is expected to open 78 points higher at 5,945
DAX is expected to open 125 points higher at 9,302
CAC40 is expected to open 65 points higher at 4,220
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