Equity markets had a rather mixed session on both sides of the Atlantic yesterday but still seem to be giving the impression of wanting to push higher, with the German DAX becoming ever more comfortable above the 10,000 level as it found steady buying interest just below the 10k for the second day in a row, and posted yet another record high and close.
US markets were unable to follow suit but still found fairly steady buying interest on dips, closing mixed as investors found little in the way of reasons to push the market aggressively one way or the other.
European bond markets on the other hand did show some weakness with yields rebounding strongly on Italian and Spanish 10 year bonds after Monday’s declines to record lows. These rebounds in yields, if maintained, could help limit any further downside in the euro in the short term particularly against the US dollar.
Today’s European market action is likely to be focussed on the UK economy, particularly in light of yesterday’s stronger than expected April manufacturing and industrial production data which showed the fastest annual rise since 2011, and raising expectations of a continued improvement in economic growth for Q2.
In another boost for the UK, data released by NIESR showed that the UK economy had now recovered all the GDP losses in the wake of the 2007 financial crisis, after posting 0.9% growth for May.
For now UK data seems to be the gift that keeps on giving and the hope is that today’s unemployment data will be similarly positive. The latest ILO unemployment numbers for April are expected to show a further drop from March’s 6.8%, coming in at 6.7%, another five year low.
Jobless claims for May are expected to decline by 25k, continuing the consistent declines seen in every month since July last year.
In fact over the last eleven months the decline in jobless claims has more or less averaged around 30k a month, a pretty good sign of an economy that appears to be humming along nicely.
More importantly, after last month’s 1.7% rise in average earnings, and a brief respite from the earnings inflation price squeeze we are likely to see wage price increases for April drop back below the CPI inflation rate, coming in at 1.2%.
This would be a disappointment and a weak average earnings number here is likely to weaken the pound as it would make the potential for any imminent rate hike that much further off, with some looking at a possible hike as soon as the end of this year, given the recent strength of some of the recent data. Weak or tepid wage growth will make it easier for MPC officials to argue for a delay in any potential rate rise.
While the UK economy appears to be doing nicely, the World Bank nonetheless slashed its global growth forecast for this year yesterday evening to 2.8%, blaming the tensions in the Ukraine and tighter global financial conditions. If recent price action is any guide this doesn’t appear to be worrying global investors too much, but this may well translate into a lower European open this morning, with little in the way of any other positive triggers available to investors.
EUR/USD – yesterday’s break below 1.3580 argues for a test lower towards the lows last week at 1.3503 and then on to 1.3480, the lows this year. Below the lows this year we also have key trend support from the 2012 lows at 1.2045, which now comes in just above 1.3440. Only a move back through 1.3600 would argue for a move back towards 1.3675, with a break above targeting the 1.3780 level.
GBP/USD – having failed to push through 1.6830 yesterday the pound has slipped back a little but remains just above support below 1.6700, as well as the 100 day MA at 1.6690. It currently remains stuck below trend line resistance at 1.6840 from the highs this year at 1.6998. A break through here could well retarget the 1.6920 area, and then the 1.7000 level.
EUR/GBP – we saw another test of last weeks and the 18 month low at 0.8064 yesterday as the pressure remained on the downside. The pressure remains on the downside while we remain below trend line resistance from the March highs sitting just below the 0.8150 level, the risk remains for further declines, with a first target at 0.8035.
USD/JPY – the range trade appears to be the order of the day for now with resistance anywhere below the 103.00 area and support near 101.00. The risk remains for a move back towards 101.80 while below last weeks high at 102.75.
Equity market calls
FTSE 100 is expected to open 8 points lower at 6,865
DAX is expected to open 7 points lower at 10,022
CAC 40 is expected to open 5 points lower at 4,590
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