Equity markets in Europe shrugged off concerns about a technical recession in Germany yesterday as they reversed their modest Monday pullback with another day of decent gains, on optimism over progress in the latest US China trade talks after President Trump tweeted that talks with China on trade “are going very well” as trade talks were extended into an unexpected third day.
On the flip side concerns over weak economic activity in Europe do make it much less likely that the European Central Bank will be able to do anything other than try and talk tough when it comes to keeping alive the prospect that rates might rise in Q4 of this year. The reality is that no-one seriously believes that they will be able to deliver on that guidance, and if there is anyone who still does, they have probably had a little too much of the post-Christmas grog.
This slightly easier outlook when it comes to central bank policy may well be a case of putting the cart before the horse, but it seems highly unlikely that we’ll get any further central bank policy moves in the first half of this year until the economic picture becomes a lot clearer and the tail risks presented by the US/China trade story, the US government shutdown, Brexit, and the economic outlook for Europe, have started to clear.
As such we can expect to see European markets open higher this morning after another positive US session saw the first successive three-day gain for US stocks since November.
The main question now being asked is whether we’ve found a base after the sharp falls seen in the last quarter. On that, the jury remains out but it is quite possible that this particular rebound may have further to run barring any new unexpected surprises.
Today’s German trade numbers for November could offer an additional salutary insight into how well, or badly the German economy is performing in Q4 after another set of shocking economic numbers yesterday, this time industrial production which continued to plunge in November. A surplus of €17.6bn is expected for November, though concerns about trade wars, and slowing economic growth could well impact that prediction. Further disappointing numbers here would really call into question the ECB’s decision to end its asset program at the end of last year.
We also have the latest Bank of Canada rate decision with some commentators suggesting that the central bank could follow the US Federal Reserve and hike rates by 25 basis points. This seems unlikely given how contentious last months Fed decision proved to be in the context of further sharp moves lower in stock markets into the end of last year.
This concern about an overly aggressive Fed policy led to last week’s backtrack by Chairman Powell in terms of future guidance, and as such it would be a little surprising if the Bank of Canada were to compound what the markets perceive may well have been a Fed misstep, by performing one of its own.
Furthermore, inflation in Canada still remains on the low side having slid sharply from 2.4% three months ago to well below 2% now, at 1.7%. Against that sort of environment and weak wage growth it is more likely that the Bank of Canada will maintain the status quo of 1.75%.
We also have the latest minutes from last months Fed meeting, where the decision was taken to raise rates for the fourth time in 2018. Chairman Jay Powell’s statement last week may well date them somewhat, however the dynamics between the various participants are likely to be significant in so far as to whether there was any unease as to how fast the Fed was moving, and if so if there was any significant disagreement about slowing down balance sheet reduction, as well as revising down the economic projections.
EURUSD – failed up near the 1.1500 area on Monday keeping the broad range we’ve been in since the end of October intact. We have support down towards the mid 1.1200’s. Interim support comes in at the 1.1370 area. Until we get a significant break either side of this range then we can expect to see more of the same. Above 1.1500 targets the 1.1600 level.
GBPUSD – made a marginal new multi month low last week at 1.2430 before rebounding strongly. We need to recover back through the 1.2820 area to retarget the 1.3000 area. We have interim support at 1.2680. A move below 1.2400 retargets the 2016 lows near the 1.2000 area.
EURGBP – the 0.9100 level remains a key resistance area despite a brief spike to 0.9120 last week. Bias remains for a move back below 0.8920 towards the 0.8820 level as the broad range of 0.8700/0.9100 that has held sway for the last four months remains intact.
USDJPY – last week’s plunge was unable to break below last year’s low at 104.60, and has rebounded strongly since then. We need to recover back through the 109.20 area to argue for a return to the 110.30 area.