CMC Markets

The doubts expressed in yesterday’s note about some of the recent moves in bond markets suggesting that some in these markets had concerns about the strength of the US economy appear to have been rather prescient, if yesterday’s price action is anything to go by.

The move higher in US U.S. 10-Year treasuries and the fall in yields to 6 month lows below 2.5% would appear to suggest that for all the recent gains in equity markets, that the stock market rally could well have extremely shaky foundations.

Yesterday’s decline in US equity markets would appear to suggest that investors are starting to catch on as the S&P 500 posted its biggest one day fall in a month.

These concerns also manifested themselves into European markets; particularly after yesterday’s GDP numbers from across the bloc appeared to confirm a lot of the wider concerns, about the strength, or rather lack of it, of the economic recovery in Europe.

The bigger surprise was the extent of the divergence across the bloc with only Germany posting numbers above expectations, at 0.8%, initially sending the DAX to new all-time highs.

As for the rest of the region some of the numbers were a bit of a horror show. Italy contracted by 0.1%, France stagnated and Netherlands GDP plunged 1.4 on the quarter. Greece contracted 1.1% and Cyprus 4.1% year on year.

Even Portugal which had shown strong growth in Q4, saw growth slump 0.7% in Q1, which is not great timing as the country gets set to exit its EU mandated bailout plan this weekend. The hope is the current turmoil is just some temporary anxiety on the part of investors, and doesn’t continue otherwise Portugal could look back and regret not taking up a precautionary credit line.

As European markets also plunged, German bunds and UK gilt prices pushed up sharply and yields fell, as investors bet that ECB action was now pretty much a nailed on certainty at the June meeting.

This rise in higher rated government bonds was also helped by a rotational shift out of peripheral bonds as Italian, Spanish, Greek and Portuguese bonds fell sharply and yields shot up.

Even if the ECB wasn’t already concerned about potential deflationary pressures, yesterday’s GDP numbers may well have made next months decision a lot easier, and the only question now is what form any action will take. It’s probably safe to assume that whatever they do it won’t be anywhere near enough, given that the QE option isn’t likely to be on the table.

Today’s economic data is unlikely to shift the dial that much the EU March trade balance set to show a surplus of €16bn. With the weekend coming up and the situation in Ukraine still unstable it is hard to imagine investors buying too aggressively today.

The only US data of note is housing starts and building permits for April, while Michigan confidence for May is set to improve to 84.5, somewhat surprisingly given how poor retail sales have been.

EUR/USD – yesterday we saw the euro rebound off the 1.3650 level which keeps us within the borders of the double top pattern we talked about yesterday. A break below 1.3650 is needed to signal the potential completion of a double top reversal pattern and trigger further declines towards the 200 day MA at 1.3620 initially, and then the February lows at 1.3480. We need a move back through 1.3780 to stabilise and retarget 1.3850.

GBP/USD – the pound continued to fall yesterday rebounding from 1.6735 and falling just short of the next support at the 50 day MA at 1.6720, and trend line support from the November lows at 1.5855. A fall below 1.6700 could well signal further declines towards 1.6625 and the 200 day MA. We need to recover back through 1.6900 to mitigate this scenario.

EUR/GBP – have we seen a short term base in the euro at 0.8128 after Wednesday’s rebound? With two day resistance at 0.8185 we need to break back through the 0.8200 area to suggest the possibility that we head back towards the 0.8250 area, and open up a retest of the 0.8300 area.

The 0.8090 level and the 2013 lows remains the next key support.

USD/JPY – having peaked at 102.38 this week the US dollar has slid back towards support just above the March low and the 200 day MA at 101.20. A move below 101.20 could well see sharp move towards 100.00. We need to see a recovery back through the highs this month at the 102.80 level to suggest a move back to the highs at the beginning of April at 104.10.

Equity market calls

• FTSE 100 is expected to open unchanged at 6,841
• DAX is expected to open 2 points higher at 9,658
• CAC 40 is expected to open 7 points higher at 4,452