US markets once again set new records yesterday ahead of today’s Thanksgiving break with the Russell 2000 standing out again, closing higher for the 14th day in succession.
European markets had a rather less positive day closing lower despite better than expected economic data from Germany and France.
This divergence between the almost irrational exuberance being displayed by investors towards US assets and the US dollar is in stark contrast to the reluctance to push money into European stocks, which is more than likely being driven by ongoing concerns about a procession of political worries, starting with next month’s Italian referendum on the 4th December.
With elections also due next year in the Netherlands, France and Germany, it is hard to see where the impulse will come from to encourage a reversal of this reluctance, no matter how enticing some of the valuations might be.
The underperformance of European markets may also have something to do with the fact that European governments remained constrained by fiscal rules which prevent the consideration of measures currently being considered by both the US and UK governments, in terms of fiscal expansion.
On the data front the latest update to German Q3 GDP is expected to be confirmed at 0.2%, while the latest IFO business confidence survey is expected to show a minor improvement to 110.6 from 110.50.
The US dollar index also closed at a thirteen year high at 101.85, recovering 61.8% of the decline from the 2001 peaks at 121 to the 2008 lows at 70.70, which could suggest that any further gains could well be vulnerable to a pullback.
The Japanese yen continued to get crushed as U.S. 2-Year Treasury yields hit their highest levels since the summer of 2010, along with spreads, as bond markets start pricing in multiple US rate rises in 2017, as economic data continued to point to a US economy that got off to a decent start in Q4.
The worry here is at what point does the strength of the US dollar start to act as a significant brake on US companies' overseas profitability?
Yesterdays’ publication of the latest FOMC minutes didn’t really tell us anything we didn’t already know from more recent utterances from senior Fed officials, given that recent improvements in economic data, more or less rubber stamp the case for a December move.
The only currency to perform better than the US dollar yesterday was the pound after the Chancellor of the Exchequer unveiled the government’s latest spending plans for the UK economy. Bond yields here also jumped sharply as the Chancellor announced that he would have to borrow another £122bn over the next five years, with nearly £30bn being set aside for infrastructure projects.
Oil prices have settled down somewhat after Iraqi Prime Minister Al-Abadi said that his country now would be prepared to cut production to boost prices, reversing the earlier stance of wanting to be excluded from any deal. The fact is OPEC and non-OPEC members can say what they like at this stage, their recent comments have diverged so much from their recent actions that unless they arrive at some sort of deal next week, the upside in the short term is likely to be fairly limited.
EURUSD – still looks on course for further losses towards the 1.0460 level and last year’s low. To stabilise we need to see a recovery back through the 1.0730 area. If we can’t sustain a recovery we could well head towards new multi-year lows towards parity.
GBPUSD – is managing to hold up well despite the strength of the US dollar with resistance just above the 1.2500 area and support down near the 1.2330 area. The prospect of further gains towards 1.2880 remains a possibility, while above these lows. Only a move through 1.2300 opens up the potential to revisit the recent lows near the 1.2100 area.
EURGBP – continues to look soft, pushing briefly below the 0.8480 area and remaining on course for a move towards the 0.8380 area. A move back through the 0.8630 area retargets the 0.8780 area in the short term.
USDJPY – the US dollar continues to tear higher pushing through the 112.40 area, retracing 50% of the 125.85/99.55 down move. We could well see a move back towards 115.60 which is the 61.8% retracement, if we hold above the 110.00 area.
FTSE100 is expected to open 2 points lower at 6,815
DAX is expected to open 3 points higher at 10,665
CAC40 is expected to open unchanged at 4,529
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