It’s been a disappointing start to the week for European markets in the wake of this week’s disappointing Chinese GDP numbers as well as the IMF downgrade of its expectations for global growth this year.
Unfortunately for the IMF they’ve arrived a little late to the party on this one as most investors had already started to price this in towards the end of last year, hence the sharp declines. In its latest update on the health of the global economy, the fund also cited a no deal Brexit, a China slowdown and trade tensions as risks to their downgraded outlook over the remainder of the year.
The easing of trade tensions between the US and China was one of the main reasons behind last week’s strong finish for equity markets, on fragile optimism that both sides would somehow arrive at some accommodation on trade in the coming days, thus averting an increase in US tariffs, which are due to increase from 10% to 25% on 1st March.
This fragile optimism was punctured abruptly yesterday evening on reports that the White House had cancelled a planned trade meeting with Chinese officials for this week, due to ongoing disagreements over intellectual property rules.
While these reports were refuted by Larry Kudlow, Donald Trump’s chief economic advisor, he did say that the important meeting was the one at the end of the month with Chinese Vice Premier Liu He, which would suggest the potential for failure still remains fairly high.
These conflicting reports still served to keep US markets under pressure given they had already been trending lower after playing catch-up, or catch down with markets in Europe, having missed out on the move lower due to being closed for Martin Luther King Day.
As a result markets here in Europe are expected to open lower this morning as expectations about a quick détente on trade become slightly more realistic.
On the Brexit front the pound has continued to trade higher on expectations that MPs will somehow coalesce around a position that avoids a no deal Brexit. The Labour party appears to be hinting that it would support an amendment that extends the deadline, however that still seems some way off given that for that to happen, only one of two things can happen. Article 50 can either be revoked or extended, and it’s not immediately clear how MPs would be able to do that without the governments assent. Furthermore an article 50 extension would also need to be approved by the European Union, and while there is nothing to suggest they wouldn’t do so, there would also need to be confidence that an extension would provide a satisfactory end point and conclusion.
In any case the pound certainly wasn’t hurt by yesterday’s economic data, which pointed to buoyant wages growth, at a ten-year high, against a backdrop of a tight labour market, as unemployment fell back to 4%, with employment also hitting a new record high.
The Bank of Japan left interest rates unchanged overnight, and in the latest sign that demand and growth are likely to remain weak the bank cut its inflation outlook for this year. The weak outlook was supported by disappointing export data, which shouldn’t have been too much of a surprise given last week’s weak Chinese trade numbers. This would suggest that interest rate policy here is not going to change any time soon, and likely to remain loose into 2020. This is something that the European Central Bank is likely to echo tomorrow if it has any sense, as rate rise expectations in Europe start to get pushed into next year.
EURUSD – just about holding above trendline support at 1.1330, from the November lows at 1.1217, but continues to look soft. We would need to see a move back above the 1.1420 area in order to stabilise. A move through 1.1300 has the potential to revisit last year’s lows.
GBPUSD – has continued to advance higher, moving back towards the 1.3000 area and last week’s highs. A move through 1.3020 could well signal further gains towards 1.3100. While below the 1.3020 area the risk is for a move back towards the 1.2820 area, as well as the lows this month at 1.2670.
EURGBP – is struggling to gain traction towards the upside, with the risk that we could see further declines towards the 0.8720 area. A move through here has the potential to retarget the November lows at 0.8660. We need to see a move back above the 0.8860 area and the 200-day MA to stabilise.
USDJPY – while above the 109.20 area, we could well see a further move towards the 110.30 area, We also have support at 108.70 and 108.20.