While European markets continue to come under pressure US markets have managed to maintain largely aloof from the fray, helped in some part by last night’s FOMC minutes, and a rebound in oil prices.
As suspected officials felt it would be prudent to wait to get a clearer picture of how the upcoming Brexit vote might turn out, as well as whether the May payrolls miss was merely an anomaly, or something to be a little more concerned about.
That being said it was clear that Fed officials were exceedingly divided on the prospects for inflation expectations as well as the outlook for the labour market in light of recent weakness in the payrolls numbers.
The rebound in oil prices was driven by a larger than expected draw in API inventories pulling them off one month lows, and this along with last night’s FOMC minutes could well see European markets open slightly higher this morning.
What is apparent is that while some of the recent data has been encouraging, the outlook for inflation when set against a rebound in the US dollar, has slipped back somewhat, while the effects on financial markets regarding the recent Brexit vote has generated a significant deflationary shock, by the sharp devaluation in the pound. Furthermore, almost unnoticed the Chinese yuan is also back at levels last seen at the beginning of the year, when concerns about a sharp Chinese devaluation roiled financial markets.
The weakness in the pound has been accentuated by concerns about the commercial real estate sector as more funds joined the initial three of Standard Life, Aviva and M&G by also freezing withdrawals from their open ended funds, as investors clamoured to withdraw their funds, while speculation about a rate cut and large scale stimulus plan at next week’s Bank of England rate meeting hasn’t helped either.
The banking sector continued to slide yesterday with new record lows for Italian banks as well as Swiss giants UBS and Credit Suisse as well as Germany’s Deutsche Bank, as yields continued to fall to record lows.
On the data front the latest UK manufacturing and industrial production data for May are due out this morning and given the sharp contraction seen in the equivalent May manufacturing PMI numbers it is hard to see how these numbers could match the sharp gains seen in the April numbers. In April we saw a rebound of around 2% in both which was rather surprising. The May numbers are expected to show a decline of in excess of 1% for both numbers.
In the wake of last nights Fed minutes we can expect a foretaste of tomorrow’s non-farm payrolls numbers, with the latest ADP employment report for June, and this is expected to show 158k new jobs, down from the 173k in May.
EURUSD – busy doing nothing for now the euro continues to struggle with the bias remaining towards a move towards the March lows at 1.0825. To stabilise we need to see a move back above the 1.1250 area.
GBPUSD – this week’s break below 1.3000 potentially opens up a bear flag towards the 1.2000 level which would only be negated with a move back through 1.3150. Support currently at 1.2800 with a break lower targeting the 1.2500 area initially.
EURGBP – while above the 0.8410 area the euro looks set for a move to the 0.8706 area, 61.8% retracement of the big down move from 0.9805/0.6535. A move back below the 0.8400 area would delay this outcome.
USDJPY – has thus far held above the 100 level but while below the 103.50 area the risk remains for a return to the previous lows at 98.95. A move below 100.00 is likely to prompt the risk of further losses and possible BoJ intervention concerns.
