The markets bi-polar nature has once again been laid bare for all to see this week, with a strong US session yesterday pulling US stocks back to where they were prior to President Trump’s announcement of an extra $100bn of tariff measures on Chinese goods that were threatened at the end of last week.
Investors appear to have taken comfort from the slightly more conciliatory line taken not only by US officials over the weekend, but also by Chinese President Xi’s comments at the Bo’ao conference, that he wanted to open up China’s economy to foreign investment, broaden market access across a number of different sectors, as well as lower some import tariffs on cars.
The strange thing is that for all the warm words, and President Trump’s positive response to them, is that what President Xi actually said wasn’t much different to previous speeches he has made in the past, which means that eventually these words will need to be turned into actions. The easiest one to deliver is probably the reduction in tariffs on cars, but even that is likely to be difficult, particularly since further talks between the various parties aren’t actually planned at the moment.
Any other measures are likely to take much longer if they can even be delivered at all, which means that for equity markets to regain a sense of equilibrium we need to start to see progress on the road away from a potential trade war, and currently there is no evidence of that whatsoever.
This may help explain to some extent why European markets despite finishing yesterday higher on the day, closed off their best levels of the day and are likely to open lower this morning.
On the data front attention is set to be focussed on the latest UK industrial and manufacturing production data for February. Recent data out of France and Germany has suggested a slowdown in this area of the economy and there is a concern that this could translate across given how UK exports have recently been driven by improvements in economic activity, not only in Europe but also more globally.
Expectations are for industrial production to rise 0.4%, down from 1.3% in January, while manufacturing production is predicted to expand 0.2%. On an annualised basis both are expected to show much better numbers of 2.9% and 3.3% respectively. Manufacturing in particular has been one area that the UK has continued to outperform in recent months with PMI’s surveys showing remarkable resilience.
Construction has been a weak spot and is expected to continue to be so particularly given the collapse of Carillion, with output expected to remain weak.
US interest rate expectations are also likely to be in focus today after yesterday’s PPI factory gate numbers for March came in at their highest levels in 4 years at 3%. This could be the first evidence that some of the recent ISM prices paid data is now starting to manifest itself in some of the officials headline numbers.
The big question is whether it will make its way down the food chain into the CPI numbers which are due out later today. It isn’t likely to happen right away, there is usually a lag but in recent months we have seen CPI start to edge higher, above the 2% level in January with an expectation that we could hit 2.4% in todays numbers. If this does happen then US 10-year yields could well start to head back above 2.8% again, though whether they’ll help support the US dollar is another matter.
The release of the latest Fed minutes for March is also likely to give an insight into policymakers thinking about the glide path of rate rises this year and any concerns they might have about the recent narratives around trade policy.
We could also get further clarity as to whether 4 rate rises this year is something that merited a serious discussion between policymakers, as well as the thinking behind adding a rate rise to the 2019 dot plots.
EURUSD – could find short term resistance at the 1.2400 level, within the broader 1.2200/1.2500 range that has constrained the price action for much of this year. We need to see a break below 1.2160 or a break above 1.2540 to suggest a strong move in either direction.
GBPUSD – continues to head towards trend line resistance at 1.4205, as well as the 200-week MA at 1.4270, which is keeping a short-term lid on the pound. We have support at the 1.3970 area and below that at 1.3720.
EURGBP – finding some support around the 0.8700 area with longer term support at last month’s low at 0.8667. We need to see a move back above the 0.8820 level to signal a move back to 0.8920. We have short term resistance at the 0.8750 area.
USDJPY – finding resistance up at the 107.50 area last week and is struggling to break higher. A move through 107.50 retargets that 108.20 area. The 105.20 area remains a key support with a break below 105.00 opening up a move towards 103.00.