CMC Markets

It was a rather mixed day for Europe’s markets yesterday with only the FTSE100 managing to register a positive session, as it consolidates its position at record levels above the 7,000 level.

The German DAX in particular appears to be showing some signs of exhaustion after ten consecutive positive weeks in a row, though other European bourses also appear to be showing some tentative signs of tiredness after a pretty impressive run of gains.

While it would be tempting to suggest that yesterday’s declines were as result of renewed concerns about the continuing impasse between the new Greek government and its creditors, it is more likely that after a simply spectacular quarter we’re starting to see some early signs of end of quarter book keeping adjustments.

The fact is the to-ing and fro-ing between Greek officials and the rest of its creditors is likely to continue for some time yet, given that Greece is just about managing to meet its various payment obligations by diverting funds from state owned companies, but they won’t be able to do that forever.

For today the focus is likely to be on the preliminary flash manufacturing and services PMI data from Germany and France for March, particularly in light of the weak Chinese HSBC (LONDON:HSBA) manufacturing PMI number overnight, which saw this key indicator slip back into contraction territory at 49.2, and an eleven month low, as the post Chinese New Year rebound proved somewhat short lived. Japanese manufacturing PMI also weakened unexpectedly as well, prompting concerns about the weak recovery there.

Even allowing for the fact that QE has only just started, the fact is borrowing costs in Europe have been at record lows for months, and as such we should now be seeing further evidence that the early flickering’s of recovery that we’ve been seeing in some of the recent economic data should now be starting to ignite into increased economic activity, particularly given that cheaper oil prices have been with us for all of this year.

German manufacturing and services PMI for March is expected to improve slightly from 51.1 to 51.5, but its services sector is the area where most of the recovery is taking place with an improvement to 55 expected, from 54.7. The German consumer in particular has started to open their wallets and started to spend more and this should continue to be reflected in the services sector, though last week’s disappointing ZEW reading seemed to suggest that maybe some of the shine is starting to come off the recent rebound in the German economy.

The French economy continues to show worrying signs of weakness, though even here there does seem to be some signs of a turnaround in economic activity, though not enough to pull the unemployment rate down, as it hit 17 year highs at 10.4% earlier this month.

Manufacturing PMI is expected to remain in contraction territory at 48.5, a slight improvement from 47.6, though services was a bright spot last month at 53.4. Even here though the worry is that we’ll see a slightly weaker reading of 52.8.

In the UK the pound has lost some of its recent shine after comments last week from chief economist Andrew Haldane last week that suggested further easing might be necessary if inflation levels continued to decline.

Whether the Mr Haldane really believes that or not, it is clear that others on the committee do not, which suggests it remains unlikely, but that being said the recent rise in the value of the pound against the euro does appear to be of some concern to some BOE officials, which suggests that this could well be a little jawboning in an attempt to talk the pound down a little.

Lower inflation is certainly the expectation when we get to see the latest CPI data for February this morning, with the headline number expected to fall further from 0.3% to 0.1%, as the latest price energy price cuts manifest themselves in this month’s numbers. Lower food prices are also expected to feed through as well, though core prices are expected to remain stable at 1.3%. The broader retail price index is expected to drop below 1% to 0.9%, from 1.1%.

It’s also CPI day in the US and after last week’s rather dovish Fed meeting caught some in the market rather off guard, it would appear that expectations remain for some form of Fed action later this year.

It is clear that Fed officials want the markets to think they are closer to raising rates than at any time in the last six years. Last night’s comments from Fed Vice Chairman Stanley Fischer certainly bear that out, but the fact remains that with prices continuing to turn downwards it is becoming increasingly difficult to see what the catalyst for a rate rise would be. US CPI for February is expected to come in at -0.1%, though excluding food and energy is expected to come in at 1.7%.

EURUSD – after last week’s move through 1.1000 got rebuffed at the trend line from the December highs, we’re now looking to retest this line, now at 1.0960. A break through here could well retarget a stronger move towards the 1.1250 area, with 1.1050 the first stop. Support remains down at the 1.0800 level.

GBPUSD – the pound appears to be struggling to push above the 1.5000 level despite last week’s spike to 1.5170. The risk here is that a failure to recover through 1.5000 could well trigger a return to the lows last week at 1.4630 via support at the 1.4830 level.

EURGBP – the rebound off the recent lows at 0.7000 has continued to gain traction with a move through the 0.7300 level looking to test 0.7350 trend line resistance from the December highs. Trend line support from the March lows comes in at 0.7230, which is also the break out level from last week.

USDJPY – the US dollar appears to be struggling with support currently at 119.30 area. With the trend line support from the lows this year appears to be set to give way we could well be set for a sell off back towards 118.20. While above the 119.30 area the risk for a move back towards the 121.00 area remains.

Equity market calls

FTSE100 is expected to open 15 points lower at 7,022

DAX is expected to open 25 points lower at 11,870

CAC40 is expected to open 12 points lower at 5,042

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