While equity markets were able to recover some of their lost ground after last week’s sharp falls, US markets closed lower for the second week in succession, despite posting new record highs, the US dollar wasn’t so fortunate having its worst week in over a year against a basket of currencies.
Since Donald Trump won the US Presidency in November, equity markets have made significant gains on the premise that his presidency would deliver a bonfire of red tape, significant tax reform and infrastructure spending. While we’ve certainly had a bonfire, it’s been one of negative headlines, own goals and political controversies, as the new President has lurched from one controversy to another.
This has seen the US dollar, along with bond yields, lose all of their Trump related gains while gold prices have rebounded, as expectations about a reflationary stimulus ebb away. This reduction in expectations doesn’t appear to have dampened the ardour of equity investors who still appear optimistic despite last week’s sharp plunge, and remain happy to buy dips, but that doesn’t mean a correction isn’t overdue, something that even now investors appear way too complacent about.
President Trump may well be out of the Washington firing line as he continues his nine day tour which includes Saudi Arabia and Israel, before heading off to the EU, and meetings in Rome, Sicily and Brussels, but that doesn’t mean that events back in the US won’t affect investor sentiment while he’s away.
Reports that he had told the Russian officials that the former FBI chief was a “nut-job”, and that dismissing him had relieved pressure on him, are being used as another example of the President’s propensity for questionable decision making.
European markets also underwent a difficult week despite posting new record highs on the DAX and FTSE100, with only the FTSE100 finishing the week in positive territory due to the rebound in the oil price ahead of this week’s OPEC meeting, where it is expected that both OPEC and non OPEC ministers will be able to coalesce around an agreement to extend the current output cap for another nine months.
How effective it will be remains to be seen given that we saw yet another rise in US rig counts last week, as US producers fill any gaps left by OPEC’s retreat from the theatre of production.
Also on the agenda this week will be the latest Fed minutes which may give us an indication into US policymakers thinking about possible balance sheet reduction, ahead of next month’s rate decision where it is still widely expected that the FOMC will raise rates again for the third time since last December, though it remains far from the done deal markets were expecting it to be just over a week ago.
Yet another example of market complacency about the direction of events perhaps, only time will tell?
EURUSD – the euro continues to make gains, pushing through the 1.1200 area, bringing it closer to the November highs at 1.1300, with a bigger resistance area at the 1.1370 area. If we fall back below the 1.1020 area then we could see a sharp move back to the 1.0950 area.
GBPUSD – finally cracked the 1.3000 area, finding some resistance at the 1.3040 area. While below here we could slip back towards the 1.2840 area. A consolidated move through here has the potential to target the 1.3320 area. Only a move below 1.2750 argues potentially back towards the 1.2600 area.
EURGBP – finding some resistance just above the 0.8620 area, near the 200 day MA, with a break targeting the 0.8720 area. Any pullbacks should find support at the 0.8540 area and the 50 day MA.
USDJPY – a disappointing week for the US dollar rebounding from the 110.20 area. While above here we could see a rebound back to the 112.40 area but also a failure to push back through here could see a move back to the 108.00 area.
FTSE100 is expected to open 22 points higher at 7,492
DAX is expected to open 14 points higher at 12,652
CAC40 is expected to open 9 points higher at 5,333
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