After a bit of a scratchy start equity markets finished the day higher yesterday, with the Nasdaq once again posting new record levels, as investors put aside concerns about trade and focussed instead on the outlook for interest rates, not only in the US, but also in Europe ahead of next week’s central bank meetings of the US Federal Reserve, as well as the European Central Bank.
Comments from ECB Chief economist Peter Praet, about the inflation outlook, as well as Bundesbank chief Jens Weidmann expressing optimism that the ECB would be able to end its bond buying program this year, helped push the euro higher along with bond yields across the region. The comments followed on from speculation that the timing of such a decision on asset purchases would be up for discussion next week, despite some concerns that the recent slowdown in data might give policymakers cause for pause.
There is the possibility that markets are reading a little too much into this speculation about a discussion on ending asset purchases at next week’s meeting. If anything, it would be surprising if the subject wasn’t discussed particularly since some form of announcement would have been needed before September at any rate.
In any case the rise in yields helped push banking stocks higher in the process, including banks in Italy which have been pressured in recent weeks as a result over concern that the new populist Italian government’s expansionary policies might put it into conflict with EU fiscal rules.
Italian borrowing costs have certainly pushed sharply higher over the last few days with the 10-year yield back up close to 3% and the 2-year yield up above 1.25%, having been much lower than that only a few weeks ago. The sharp rise in borrowing costs here has raised some concerns about the ability of the Italian government to fund its huge debt, and in comparison, to other European countries there is a premium in the price compared to a few weeks ago.
Despite this premium it always helps to have some context, given that even at these levels Italian rates still remain very low, and are still well below the median average prior to the financial crisis when average long-term rates were around 4%, which means that even at current levels rate levels are still manageable.
For now, markets in Europe appear to be settling down a bit after some significant volatility in the short term with both Spain and Italian markets showing signs of stabilising, though Italy remains a bigger concern.
On the trade front markets shrugged off the news that the EU was pressing ahead with retaliatory tariffs on a range of US goods to the value of around €2.8bn, with a view to them starting in July. The delay in implementation may well have helped terms of the lack of market reaction in that regard as the measures need to be reviewed by national parliaments.
The pound appears to be shrugging off concerns, for now, about upcoming political turmoil as the UK Prime Minister comes under fire for her dithering over the Irish border question, as well as her plans to tie the UK to EU rules indefinitely, while the issue is resolved. This is said to not sit well with David Davis the Brexit secretary, who has become increasingly sidelined amidst speculation he could resign. If that does happen then it would send a terrible signal to the EU at a delicate stage of the negotiations, though every stage is delicate at this late point in what is becoming an ever more shambolic process. It’s almost as if the government is doing its best to deliberately appear incompetent.
EURUSD – the break above the 1.1750 area opens up a retest of the 1.1830 area and possibly even higher towards 1.1930. A move back below 1.1720 defers this prospect and opens up a return to 1.1650.
GBPUSD – closing in on the 1.3460 area, with a break through here targeting a move to 1.3530. We have interim support now at 1.3370 and below that at 1.3270. Support also remains back at the May lows at 1.3200, with a break targeting broader support just below that at 1.3110 trend line support from the January 2017 lows.
EURGBP – continues to funs resistance just above the 0.8800 area and support just above the 0.8700 area. The prevailing range remains intact with a break below 0.8690 targeting the 0.8640 area. The 200-day MA at 0.8850 should cap the upside.
USDJPY – the move to the 200-day MA and 110.30 appears to have played out, with a break through 110.50 targeting the previous highs at 111.30. Support comes in at the 109.50 level.