After a soft start at the beginning of last week European stocks enjoyed a strong two day rebound to finish the week somewhat mixed with the FTSE100 finishing the week slightly lower, and the DAX slightly higher.
The rebound in US markets was slightly more robust as they finished higher for the third week in succession boosted by expectations that the US Federal Reserve may well be forced to delay its long anticipated rate rise, as US economic data and divisions amongst senior Fed policymakers prompted investors to reassess the time horizons on potential move on interest rates. We could well get some further colour on that later today when Lael Brainard, one of two senior Fed policymakers who last week cast doubt on a Fed hike this year, speaks later today on cutting regulatory red tape. Will she row back on last week’s comments or revert to script?
Uncertainty about the prospects for global growth and disinflationary pressures continue to prompt expectations of loose monetary policy, not only in Europe, but in Asia as well with further policy easing expected out of China in the coming weeks.
As if further evidence were needed as to concerns about the global economy, we got further evidence at the weekend with Deutsche Bank (DE:DBKGn) being the latest in a line of investment banks announcing a radical overhaul of the business in the wake of lower profitability and corporate scandals.
In the oil and gas sector two of the biggest independent oil explorers in the North Sea warned that another 10,000 jobs could go in addition to the 5,500 jobs that have already been lost in last year, according to Oil and Gas UK.
A recurring theme coming out of last week’s company earnings reports was a weakening of demand in Chinese markets, a factor cited by Burberry (L:BRBY), Hugo Boss (L:0Q8F), Nestle (VX:NESN), Yum! (N:YUM) and Wynn Resorts (O:WYNN) amongst others, and with global economic bellwether Caterpillar (N:CAT) due to report later this week, after warning on its outlook and revenues in September, expectations are for further disappointment this week.
Attention this week will once again be on the Chinese economy despite assurances from Chinese officials that what we are seeing is the natural growing pains of an economy merely adjusting to the normal ebb and flow of a shift from an industrial base to a more services based economy.
Last week’s China trade balance numbers showed that while exports improved slightly, the sharp drop in imports suggested that internal demand remains constrained by the weakness in commodity prices, as well as lower domestic consumption, raising concerns that the Chinese government could well find it difficult to hit its 7% GDP target for this year.
This morning’s Chinese Q3 GDP was expected to reinforce these concerns, but came in rather conveniently slightly better than markets had been expecting at 6.9%, and above some of the more pessimistic expectations of 6.7%.
While most people accept that China’s GDP numbers should only be taking at face value, due to concerns that it is artificially inflated, this number does seem surprisingly good given how weak some of the more recent individual data components have been.
This is borne out by a much bigger than expected drop in the September industrial production numbers, which came in at 5.7% and well below expectations of 6%, and well down from 6.1% in August, while Chinese retail sales saw an increase of 10.9%, only slightly higher than August’s 10.8%. Fixed asset investment also disappointed, coming in at 10.3%, down from 10.9% in August.
As a result concerns about the Chinese economy are likely to be front of mind when Chinese President Xi Jinping arrives in the UK today for a state visit, where we could well see the announcement of some lucrative deals as well as future key areas of co-operation.
While earnings are expected to dominate this week we can also expect to hear from the ECB at its latest policy meeting where the bank is expected to update its latest growth and inflation projections, which in turn could give clues as to whether the bank might extend its QE program beyond September 2016.
EURUSD – last week’s bearish key day reversal and failure to overcome the 1.1500 area keeps the pressure on for a move towards 1.1220 in the short to medium term which is where we have the 100 day MA.
GBPUSD – last week’s failure to push above the 1.5500 area significantly suggests we may have to wait awhile for a move towards 1.5630. The market is looking a touch overbought which could bring us back to support at 1.5420 and 1.5360.
EURGBP – last week’s failure to overcome the 0.7500 area could well see further declines on move below the 0.7320 area towards the 200 day MA at 0.7270, and the September lows at 0.7200. We need to see a rebound back through 0.7420 to retest the highs at 0.7495.
USDJPY – in a proverbial case of watching paint dry we continue to oscillate between the range extremes of 121.00 and 118.20. The bias remains to the downside while below the 120.00 area, with a break of 118.00 targeting the 116.00 August lows.
Equity market calls
FTSE 100 is expected to open 3 points lower at 6,375
DAX is expected to open 16 points lower at 10,088
CAC40 is expected to open 4 points lower at 4,698
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