It turned out to be a tricky day for investors yesterday, with buoyant economic data on the one hand but a lack of conviction on the other, as European markets struggled to go anywhere while US markets turned sharply lower late on after the latest Fed minutes.
This late slide looks set to weigh on Europe’s markets this morning ahead of the start of today’s nervously anticipated meeting between President’s Trump and Xi. What President Trump will we see, the one who met UK Prime Minister Theresa May, or the one who met German Chancellor Angela Merkel?
It is this unpredictability that makes markets nervous, particularly since, by his own admission the US President expects the meeting to be difficult, even more so given another missile test this week by North Korea.
In Asia, markets turned lower in response, though they weren’t helped by a disappointing Caixin services PMI number from China which showed that economic activity, though positive hit its lowest level since September last year, casting doubt on the robustness of recent officials data, which panted a far rosier picture.
Once again we saw US economic data point to a fairly buoyant jobs market, however the fact that jobs gains continue to remain high at a time of stagnant wages would suggest that there remains a significant degree of slack in the labour market. This was one of the reasons for the dissent of Minneapolis Fed President Neel Kashkari when the Fed raised rates last month.
Yesterday’s ADP report of 263k raised the prospect of another bumper payrolls report tomorrow, but the ISM services report painted a slightly more subdued picture with a drop to 55.2 in March from February’s 57.6, a five month low, while the employment component also fell quite sharply.
Last night’s publication of the minutes shone some light on that discussion which it turned out was a pretty extensive discussion, much to the surprise of some in the market who believed that it wouldn’t be that high a priority.
As it turns out it seems that a number of members are keen to start looking at the process for doing exactly that, and look at starting to bring it down from its $4.5trn size.
While undoubtedly that should be seen as a US dollar positive in terms of tightening, the extensive discussion would appear to call into question the pace of future rate rises. The admission from House Speaker Paul Ryan that tax reform is likely to take much longer to achieve than doing anything on healthcare reform wasn’t the good news markets were looking for either, as the reflation trade hit another pothole.
A slide in oil prices after hitting one month highs also helped bring stocks lower after the latest set of EIA inventories, showed a surprise build of 1.57m barrels, disappointing those in the markets who were expecting a decline in stockpiles, and catching oil bulls completely the wrong way round.
The pound had a fairly decent day all told after services PMI for March came in slightly better than expected raising the prospect of a slightly more robust UK economy in the first quarter, and it seems quite likely that the pound could well be on the cusp of a break to the upside, and a move towards the 1.3000 level in the medium term.
EURUSD – while below the 1.0720 area the risk remains for a move towards the 1.0600 initially and potentially 1.0580. We need to get back above the 1.0780 level to stabilise.
GBPUSD – currently finding support at the 1.2420 area and 50 day MA. We also have support down near the 1.2350 area, but while above here the risks favour a move higher through 1.2700 towards the 1.3000 area. Only a move below the1.2350 area would call this into question.
EURGBP – finding resistance at the 50 and 200 day MA at 0.8590 area for the moment. A move above here retargets the 0.8620 and 0.8700 level. While below the 0.8590 area the risk of a retest of the previous lows at 0.8400 remains. We also have support at 0.8450, trend line from the December lows.
USDJPY – currently finding support just above the 110.00 area we need to push back through the 111.60 area to stabilise and argue for a return towards the 112.50 area. Only above 112.50 the risk of a move below 110.00, and towards the 108.50 area diminishes.
