Having seen sharp falls last week the softer tone in European markets continued yesterday as nervous investors continued to lock in profits as the EuroStoxx 50 dropped to levels last seen in late September, before rebounding.
The reasons for the sell-off aren’t immediately obvious, with recent economic data looking fairly decent and today’s German data is expected to reinforce that, with Q3 GDP expected to come in at 0.6% while ZEW economic sentiment is expected to improve to 19.8 in November. EU Q3 GDP is also expected to come in at a similar level of 0.6% ahead of today’s speech by ECB President Mario Draghi in Frankfurt this morning.
It could just be that in the absence of further catalysts to go higher and valuations already quite rich that momentum has started to turn and it is time to lock in some profits as we head towards the end of the year.
US markets had a slightly more stable day and despite two days of declines still remain within touching distance of recent all-time highs. It would appear that US investors, despite the fractious nature of Washington politics, are still clinging to the increasingly remote possibility that some form of tax reform remains possible before the end of the year. This remains unlikely particularly since the thorny topic of the raising of the debt ceiling is set to be revisited in the next few weeks, having been deferred in October as a result of the Atlantic hurricane season damage.
In Asia the latest industrial production and retail sales data from China showed that the Chinese economy slipped back a little in October as industrial production for October slowed to 6.2%, from 6.6% in September, while retail sales came in at 10%, well below market expectations of 10.5%. While this is disappointing this may well have been Chinese consumers holding back ahead of the traditional November Singles day which over the weekend set new records for sales and could show a decent rebound to make up for a lacklustre October performance.
The pound had another one of those days yesterday as the currency came under pressure over speculation about the future of Prime Minister Theresa May, as the internal politics of the Conservative party once again overshadowed Brexit talks, amidst talk that moves are once again afoot to unseat the Prime Minister, from disaffected Tory MP’s.
Against this familiar Machiavellian backdrop it’s once again set to be another important week for the UK economy as we gear up for the latest inflation, unemployment, wages and retail sales data for October, and the beginning of Q4.
Earlier this month the Bank of England finally acknowledged the error of its ways just over a year ago, and reversed last year’s rate cut and moved the base rate back to 0.5% in an attempt to try and keep a lid on the recent rise in inflationary pressure which was brought about by the decline in sterling to levels of around $1.20 at the end of last year.
Today’s latest October CPI number is expected to see inflation push above the 3% level for the first time since April 2012 and prompt the Governor of the Bank of England to write a letter to the Chancellor of the Exchequer and explain why the central bank has missed its inflation target of 2% by more than 1%. One thing is certain the letter isn’t expected to be in the form of a mea culpa.
While inflation is expected to remain sticky the UK economy has still managed to post some fairly decent numbers in manufacturing as well as services in the past month or so, as the economy continues to prove itself fairly resilient to all the hyperbole uncertainty surrounding the ongoing Brexit discussions. Core CPI is expected to rise to 2.8%, and almost 5 year high.
On the RPI measure prices are also expected to rise further and move above 4%, however there are signs that this may well be the high water mark for prices if recent falls in producer prices are any guide. These do appear to be showing signs of slowing down and given that they are forward looking indicators could well suggest that a slowdown in prices could start to come as we head towards 2018. Input prices are expected to drop back from 8.4% in September to 4.7% in October.
EURUSD – found support at 1.1550 but hasn’t as yet been able to move back above the 1.1700 level which could undermine the prospect of a move lower towards 1.1390. The 1.1700 level is the neckline from the recent head and shoulders pattern break.
GBPUSD – currently has support at the 1.3020 level and needs to move above the 1.3220 level to argue for a retest of 1.3320, and the highs this month. A move below 1.3000 argues for a move towards 1.2930.
EURGBP – currently has resistance at the 0.8940 area which is the 100 day MA and the highs this month. A move through 0.8940 argues for a retest of the 0.9000 area. Support comes in at the 0.8870 area.
USDJPY – we need a move through the 114.50 level to argue for further gains towards the 115.60 area. Support comes in at the 113.10 area and last week’s low, with a break of 113.00 retargeting the 112.40 area.