In the absence of US markets yesterday, European markets did manage to eke out a positive session despite a disappointing final Q3 German GDP number, and another new 13 year high for the US dollar index, but despite yesterday’s rebound it’s been a lacklustre week for European markets, overshadowed by the record levels being set in the US.
Yesterday’s ECB semi-annual financial stability report appeared to put its finger on one of the key factors behind the underperformance of European equity markets relative to its US and UK counterparts, saying that increasing political uncertainty across the bloc was putting at risk the stability of the euro zone.
The report also made reference to the European banking sector and the amount of non-performing loans as a key concern.
This reluctance by investors to push money into European stocks may also have something to do with the fact that European governments remained constrained by fiscal rules which prevent the consideration of measures currently being considered by both the US and UK governments, in terms of fiscal expansion.
The differences are certainly no better displayed in the relative economic performance of countries like the US and the UK, where unemployment is low and GDP growth is above average.
Today’s latest UK Q3 GDP revision will be the latest iteration of that economic outperformance, where it is expected to come in unchanged at 0.5% on a quarterly basis, and 2.3% on an annualised basis.
That’s not to say everything is fine and dandy, far from it as it is likely that business investment might see a sharp decrease of 1%, due to some of the uncertainty created as a result of the summer Brexit vote.
Exports are expected to show an improvement due to the weaker pound, with an increase of 1% expected, while the services sector is expected to show that it did most of the heavy lifting.
The latest CBI retail sales numbers for November are also expected to show a slight slowdown on the October numbers, particularly since they won’t reflect any activity from any Black Friday and Cyber Monday business over this weekend. That being said this particular weekend hasn’t been as popular in recent years in terms of shopping activity as it was a couple of years ago, simply because retailer margins are a lot tighter now and the scope for bargains is that much less. Retailers also tend to be more price competitive all the time now which makes cutting prices that much more difficult.
There is some US data due out later as US markets return for a light trading half day, and while the latest US trade data for October is expected to show a $59bn deficit, the main focus remains on when the ongoing strength of the US dollar starts to temper investor enthusiasm for US stock markets.
It doesn’t appear to be at the moment but there will come a time when it might start to act as a brake on US corporate profits.
EURUSD – last year’s low at the 1.0460 level remains a key barrier to a retest of levels seen at the beginning of the century, with parity an initial target. While above here we remain susceptible to a short squeeze back towards the 1.0730 area.
GBPUSD – continues to find resistance just above the 1.2500 area, however the dips keep getting shallower which might suggest a break higher could be on the cards. With support down near the 1.2330 area the prospect of further gains towards 1.2880 remains a possibility, while above these lows. Only a move through 1.2300 opens up the potential to revisit the recent lows near the 1.2100 area.
EURGBP – continues to look soft, finding some support just above the 0.8450 area and remaining on course for a move towards the 0.8380 area. A move back through the 0.8630 area retargets the 0.8780 area in the short term.
USDJPY – the US dollar continues drive higher, through 112.40 and retracing 50% of the 125.85/99.55 down move. We could well see a move back towards 115.60 which is the 61.8% retracement, if we hold above the 110.00 area.
