European markets broke their six day losing streak yesterday posting some decent gains in the process but significantly the rebounds while decent, still weren’t able to get markets back to the levels seen at the Monday close.
US markets underwent another turbulent day, opening lower initially, rallying strongly throughout most of the day before sliding back again into the close. Once again it was movements in bond markets that appeared to be driving events with a poor treasury auction prompting a move higher in 10 year yields back above 2.8%. This move higher in yields prompted US markets to drift back down and close lower on the day, as all the gains of the day melted away faster than an ice cube in the desert.
Asia markets initially took their cues from Wall Street’s sell-off, but soon saw their focus shift to the latest China trade data for January which saw imports surge by 36.9%, and well above expectations. This is likely down to possible stockpiling in preparation for Chinese New Year, which starts next week, though recent cold weather also saw coal and oil demand surge. The numbers do suggest that the Chinese economy appears to have got off to a solid start in 2018. Exports also increased slightly above expectations suggesting that global demand remains healthy.
As a result of last night’s late US sell-off markets in Europe are still set to open lower this morning as investors continue to digest the impact of recent price moves. While yesterday’s moves were slightly more orderly, it appears to be far from clear that the recent increase in volatility has subsided.
When markets undergo the magnitude of volatility seen over the past few days, there are bound to be additional aftershocks in the days afterwards, which means that we will continue to see choppy price moves in the days ahead.
At the Bank of England last inflation report in November last year the bank raised interest rates back to 0.5% but remained cautious on the economic outlook overall, whilst claiming that the decision to raise rates was driven by medium term inflation risks.
In the aftermath of that decision the pound slumped against the US dollar to a low of 1.3040, but since then we’ve seen sterling rise to as high as $1.4300, though it has lost ground against the euro. Soon after that decision we saw CPI inflation rise to 3.1%, prompting the Bank of England governor to have to write to the Chancellor of the Exchequer explaining why the central bank missed its 2% inflation target by more than 1%.
The bank raised its growth forecasts for 2017 to 1.5%, while nudging down its estimate for this year to 1.7%. The Monetary Policy Committee also revised its inflation forecasts for this year down to 2.4% from 2.5% which even now seems a little optimistic given how recent input prices data has shown that prices have continued to rise, along with other commodity prices more generally, and could keep CPI inflation up or around the 3% level for some time to come.
While CPI inflation has slipped back moderately to 3% from its peaks at the end of last year, on the RPI measure it has actually increased, raising the question as to whether the bank is being too optimistic about the ability of inflation to start falling back to that 2% target level.
Fortunately for the MPC wages do appear to be starting to show signs of life having risen to 2.4% in the three months to November according to recent data, though there is some optimism that these numbers might be understating the increase in wages we’ve been seeing if recent data from HMRC is in any way accurate.
Today’s interest rate decision isn’t expected to offer too many surprises on the rates front, the main steer for the next move in the pound will come from Governor Carney’s assessment of the UK economy, which he has already stated is suffering from under investment as a result of the uncertainty being generated by the Brexit talks. Markets will also be looking for any further steers on the outlook for wages growth, as well as productivity which has also started to show signs of improving.
It will be in the area of wages that markets could well focus most of their attention, particularly in light of last week’s strong US wages numbers, which has made bond markets globally particularly susceptible to how policy makers view the outlook for them.
EURUSD – has broken below support at the 1.2320 area yesterday, which opens up the potential for a retest of the 1.2160 area. We need to get back above 1.2330 to stabilise. Resistance remains back at the recent highs last week just above the 1.2500 area.
GBPUSD – currently finding support at the 1.3830 area which needs to hold to prompt a rebound back through the 1.3970 area. To stabilise we need to move back through the 1.3980 area to retarget the 1.4100 area. A move below 1.3830 retargets the 1.3660 area.
EURGBP – yesterday’s failure to push through the 0.8910 area and trend line resistance from the October peaks at 0.9050, has seen the market move back down again. We need to hold above the 0.8810 area or run the risk of a retest of the 0.8750 area. A move through 0.8920 retargets the 0.8980 area.
USDJPY – found support at the 108.40 area yesterday but still has resistance at the 110.2 area in the short term. This looks likely to remain the trading range in the short term.