The Dow Jones Indudtrial Index continues to diverge from the rest of US markets, posting another record high along with the Russell 2000, while the US dollar index continued to push higher, closing at its highest levels this year.
The more representative Nasdaq and S&P500 have continued to lag behind, as has the Dow Jones Transportation index which in some sense should act as a little bit of a red flag warning to those who are becoming a little too carried away with this Trump bump in stocks.
For investors to have confidence that a stock market rally is sustainable, these indexes should ideally be moving in sync with each other, that they are not doing so should act as a warning sign particularly since bond markets are looking soggier by the day.
Not only did US 10 year yields hit their highest levels this year, but UK gilt yields managed to recover all their post Brexit losses, closing above 1.4% and wiping out the combined effects of the various easing measures taken by the Bank of England in the wake of the vote.
While these declines in bond prices have been put down to fears that President elect Trump could embark on a reflation and stimulus policy in the coming months, in reality bond markets were already starting to roll over before last week’s events, due to concerns about rising inflationary pressure, not only in the US, but also in the UK and the EU as well with CPI inflation posting levels last seen in 2014, as investors gear up for a rise in US rates next month, with a hike now a 92% probability, according to Fed funds futures.
All that’s happened in the last few days is that prices have been given an added shove lower, and could have further to go especially if this week’s inflation numbers from the UK, EU and US reinforce the fact that the embers of inflation are starting to turn from a flicker into a flame.
Today’s October CPI inflation data from the UK is expected to show that prices edged up again, this time to 1.1%, up from 1% in September, while the latest RPI measure is expected to jump from 2% to 2.3% on an annualised basis.
Input prices which have been a significant forward looking indicator in recent PMI data releases are also expected to show an increase from 7.2% to 9.3%
While this is unwelcome news it was always going to be the case that the oil price effect of the last two years would start to work its way out of the numbers, and it is this effect we are now starting to see, though we did get some welcome news last night when the big supermarket retailers all announced 3p a litre cuts to their own petrol prices on the back of the recent decline in the oil price and rebound in the pound.
It is here that the effects of the rise in prices and the recent headlines about big price rises could well get mitigated as the big supermarkets continue to fight for market share.
Other data due out to day includes German Q3 GDP, Eurozone Q3 flash GDP, German ZEW expectations for November, as well as US retail sales for October.
The Q3 GDP numbers are expected to show a slight slowdown to 0.3% in Germany, from 0.4% with the headline Eurozone expected to remain at 0.3%.
US retail sales for October are expected to rise 0.5%, slightly down from 0.6% in September as US consumers start to come out of hiding as we start to see some evidence of an increase in wages in the last few months.
EUR/USD – the euro continues to come under pressure sliding towards the 1.0700 level, with a break potentially opening up the previous lows at 1.0460 from last year. We would need to see a recovery back through 1.0830 and then the 1.0950 area to stabilise.
GBP/USD – the pound hit a high of 1.2670 level last week but has slipped back for the time being. The prospect of further gains towards 1.2880 remains a possibility, while above the 1.2420 area. Only a move through 1.2330 opens up the potential to revisit the recent lows near the 1.2100 area.
EUR/GBP – last week’s decline through the 0.8780 area to the 0.8565 area has the potential to extend even further towards 0.8380 in the short term. For this to unfold the euro needs to stay below the 0.8780 area in the short term.
USD/JPY – the move beyond the 200 day MA at 106.65 has seen us move higher through the 108.00 level and which could see further gains towards the 110.00 level. The move through 106.80 appears to have been the catalyst here and this should now act as support.
FTSE100 is expected to open 33 points higher at 6,786
DAX is expected to open 55 points higher at 10,748
CAC40 is expected to open 28 points higher at 4,536
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