Last week the IMF articulated its concern that the global recovery was starting to show signs of fatigue with the only doubt being over the timing of the next slowdown. Looking at some of the recent data there are signs that economic activity has slowed since the end of last year, with particular concerns around the Chinese economy, as well as a modest slowdown in European activity, albeit from fairly elevated levels.
In contrast the US economy appears to be holding up well, with a strong Chicago manufacturing PMI on Friday, however away from economic concerns, worries about rising trade tensions and uncertain politics are also expected to play a part as well.
Rising oil prices are also a cause for concern, a fact that central bankers don’t appear to be that alive to for now, though these prices have slipped back a touch overnight. Last week US oil prices hit their highest levels since 2014 after last week’s announcement by the US State Department that the US expected its allies to stop all imports of Iranian crude by November. Brent crude prices also look set to retest their recent peaks above $80 a barrel, bad news for consumers and businesses alike.
In the wake of last week’s price surge, President Trump in comments made over the weekend, called on Saudi Arabia to open the taps further, to the tune of 2m barrels a day to help mitigate the loss of Iranian and Venezuelan output. In what turned out to be a busy weekend for the US President he also warned European companies that they risked sanctions if they violated US restrictions on doing business with Tehran, and that no exemptions would be made.
The US President also appears to be showing no signs of toning down his approach to his trade policy when he claimed that the EU was “as bad” as China when it came to their approach to trade. With the latest Chinese tariffs due to kick in at the end of this week, President Trump appears to be in no mood for compromise with the European Commission braced for the prospect that the US could well implement new tariffs on the automotive sector.
Canada also implemented tariffs of its own at the weekend on a range of US products including whisky, orange juice and yoghurts, as well as beef in retaliation to US steel tariffs, with no signs of progress in the ongoing NAFTA talks, after President Trump indicated he wanted to wait until after the midterms before moving any further forward. China is also expected to take aim at soybeans as well as pork in the coming days.
Against this backdrop it looks like July is set to follow a similar pattern to June with heavy falls in Asia set to be followed by a weaker open this morning in Europe.
It was a difficult week for German Chancellor Angela Merkel at the EU summit last week, coming away with a face-saving deal on immigration, however selling the deal at home appears to have been more difficult after her interior minister Horst Seehofer offered to resign saying the measures were inadequate and would lead to more migration, not less. This could well call into question the sustainability of the long-standing CDU/CSU alliance that has proved such a rock of stability in German politics, as well potentially removing Mrs Merkel’s majority in the Bundestag.
It’s also a busy week for data starting today with the latest manufacturing PMI numbers for June from Europe, the UK and US. The latest Chinese numbers weren’t too bad, more or less coming in as expected on Saturday.
Today’s Spain, Italy, France and Germany manufacturing PMI are expected to show fairly positive numbers; however, momentum has been showing signs of slowing in the last few months, and last week’s flash numbers from France and Germany didn’t appear to offer much comfort with expectations of a dip to 53.1 and 55.9 respectively. Spain and Italy are expected to come in at 53.6 and 52.6 respectively.
In the UK manufacturing has been holding steady for most of this year and is expected to end Q2 with another fairly decent number. Having had a decent Q1, Q2 has been slightly softer but nonetheless the June manufacturing PMI is expected to come in slightly softer at 54.1, down from 54.4.
EURUSD – Friday’s rebound failed to move beyond the highs at 1 1720 and as such we remain range bound, though we now have support at the 1.1620 level. A move back below the 1.1600 area opens up a retest of the May lows at 1.1510/20. A break below 1.1500 has the potential to open up a move towards the 1.1360 level.
GBPUSD – the rebound on Friday could well see a move higher given it had to the look of a bullish reversal, after last week’s low at 1.3050. The lack of follow through on the downside below 1.3100 makes the pound susceptible to short squeeze. The next resistance comes in at the 1.3220 area with a break targeting 1.3340
EURGBP – despite moving beyond the 200-day MA at 0.8830 and almost touching the 0.8900 area, we closed well short of it. If we fall back below 0.8820 then we could well drift back towards the 0.8780 area, with broader support at 0.8700.
USDJPY – moved back above the 110.00 area last week which brings the recent highs at 111.00 back into focus. A move through 111.00 targets 112.00. Support now comes in at the 109.70 and 109.20 area.
