European markets declined for the second day in succession yesterday, buffeted by the announcement of a global travel alert by the US state department, followed by the shooting down of a Russian fighter jet by a Turkish military F-16.
While this escalation of geopolitical tensions has served to help put a short term floor under oil prices it has put an already fragile market even more on edge as investors gear up for the prospect of a Federal Reserve rate rise next month.
With US markets having to contend with a shortened week due to the Thanksgiving holiday, the rebound in energy prices did prevent US stocks following their European counterparts lower, as we await a data deluge of US data later this afternoon, including the latest durable goods numbers for October as well as the latest inflation data.
Before that we have the small matter of the Autumn Statement and comprehensive spending review from UK Chancellor George Osborne.
While today’s Autumn Statement is likely to be more important for political reasons than economic ones, particularly the politically difficult changes to tax credits, this month’s horrific events in Paris have shifted the focus somewhat towards a rethinking of the planned reductions in the Defence and Home Office budgets, which could well be significant for companies who have procurement contracts with the UK government, which has been reflected in the recent rebounds in defence related stocks like BAE Systems (L:BAES) and Cobham (L:COB). We could well see some more detail in the context of digital investment, in terms of cyber-crime.
Another focus for markets will probably be around whether the government chooses to make any changes to the controversial additional tax surcharge on bank profits of 8% on top of the usual corporation tax rate, which is due to apply from January. The main criticism is that it is likely to discourage competition in the sector given the low level the tax kicks in which is at £25m, disproportionally affecting smaller banks like Metro Bank, who have a smaller presence and whose margins are tighter.
Other areas the Chancellor could focus on in the wake of the VW emissions scandal could include an increase on vehicle and fuel duty on diesel cars, as well as the level of business rates, which the Chancellor has pledged to devolve locally, and which are in dire need of reform, something that Tesco (L:TSCO) boss Dave Lewis took aim at recently and also prompted a meeting earlier this month with the head of John Lewis (L:JLH)and Sainsbury (L:SBRY), with Treasury officials.
Yesterday’s upgrade to US Q3 GDP to 2.1% was on the face of it encouraging, but it came about largely as a result of fairly strong build-up of inventories as well as a solid level of personal consumption.
The personal consumption numbers in particular are misleading as they include the payment of healthcare insurance premiums which consumers are obliged to pay, which means it can hardly be classified as discretionary spending of the type that helps drive a strong economic recovery.
So far this year durable goods excluding transports have declined 2.2%, which for a US economy that is supposed to be performing well as a result of increased consumer spending seems rather anomalous. Expectations are for a rise of 0.4%, an improvement on the 0.3% decline seen in September.
As far as the latest inflation numbers are concerned we get the latest PCE inflation numbers for October and these are likely to be of more value given recent comments by Fed chief Janet Yellen that both jobs and inflation have to be showing evidence of turning up to justify a rate rise.
The Fed’s preferred measure of inflation specifically excludes the more volatile measures of energy and food prices. The year on year numbers are expected to edge up to 1.5% from 1.4%, while remaining unchanged at 0.1% month on month.
Weekly jobless claims are expected to stay unchanged at 271k.
EURUSD – we currently have down trend line resistance at 1.0660 from the 1.1500 highs, which is keeping the pressure on the downside. While below 1.0820 the risk remains for a retest of the March lows at 1.0460. 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 – last week’s bearish daily reversal could signal a return to the 122.20, but 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 23 points higher at 6,300
DAX is expected to open 28 points higher at 10,962
CAC40 is expected to open 13 points higher at 4,833
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