In what turned out to be a rather mixed and volatile month for global stock markets last month, European markets continued to struggle against a backdrop of concerns over rising political risk, as well as concerns about trade, while US markets performed strongly after it was perceived that the Federal Reserve was resiling about committing itself to an aggressive rate hiking cycle in 2019.
We could well get some extra colour on this later today with a host of Federal Reserve policymakers due to speak later. We have Fed vice chair Richard Clarida speaking again, as well as Randal Quarles, John Williams and Lael Brainard.
Last week’s late rally in US stocks was also helped by some cautious optimism that we might not see an escalation in trade tensions between the US and China over the weekend. This optimism proved to be justified as and has been reflected in a strong rebound in Asia and a likely positive open in Europe this morning, in the aftermath of the weekend meeting between President Trump and President Xi. Both men agreed that, the US and China call a 90-day truce at the G20 to allow further time for talks to progress between the two parties.
In a manner of speaking this was a fairly easy win for both, given some of the recent weakness seen in a number of global economic indicators, which has raised concerns about slowing global demand, a fear that was reflected in last month’s 21% fall in Brent crude oil prices, and which is set to be the topic of much frenzied speculation about the potential for an up to 1m barrel a day production cut at this week’s OPEC meeting in Vienna.
In reality it was never likely that either side was going to back down in their trade disagreements, and upping the ante this close to Christmas would likely have been counter-productive, so the option to maintain the current status quo and defer the 15% increase in tariffs on Chinese goods, due to kick in on January 1st is not only a positive step, but also a fairly easy option to take. The threat to also delay any possibility of including the remaining $267bn worth of Chinese goods in the tariffs net has also been construed as a temporary positive.
It also means that markets should be able to park concerns about a trade escalation until next year, and focus instead on the countdown to the UK parliamentary vote on Prime Minister Theresa May’s Brexit deal, where the arithmetic continues to look challenging, in terms of the deal getting through parliament.
This uncertain backdrop is likely to continue to drive moves in the value of the pound in the coming days, while this week’s OPEC meeting could well help herald a rebound in oil prices after some precipitous falls in the last two months, with talk of some form of .prodcution cut likely to see a rebound in prices this week.
Equity markets on the other hand have got off to a strong start to the final month of 2018, with the weekend China/US truce providing a nice tail wind in Asian stocks, and which is set to blow through into a strong European open, as we head into December.
On the data front today’s focus will be on the latest November manufacturing PMI’s where we’ve continued to see sustained weakness in this global sector with Japanese manufacturing hitting a two-year low last month.
The latest Germany and France flash numbers also showed similar weakness last week. France’s numbers were particularly disappointing, only 0.7 points away from outright stagnation. If this weakness is confirmed in today’s numbers it really calls into question expectations about the policy path of central bank withdrawal of monetary stimulus, or quantitative tightening that has been the hallmark of this year’s price action, particularly with respect to European Central Bank monetary policy.
A slowing economy will be especially difficult for French President Emmanuel Macron coming as it does against a backdrop of civil unrest the last two weekends, which could well cause extra damage to an already slowing economy.
We’ll also get a look at how well the Italian economy has been faring amidst a backdrop of concerns about its banking system as well as slowing economic activity, we could see manufacturing contract further in November from 49.2 in October to 48.9.
While the EU continues to push back against the Italian government’s ambitious budget plans, maybe the EU commission should ask itself what it hopes to achieve in curbing the Italian governments plans to spend a little bit extra when the economy is clearly struggling.
EURUSD – has thus far failed to move beyond the 1.1500 area and this continues to cap the upside. While below here we could see a retest of the 1.1280 level in the short term, with the potential to revisit the lows earlier in November.
GBPUSD – continues to consolidate above trend line support from the August lows at 1.2710. While above here the recent range is likely to remain intact. Below 1.2600 could well open up a move towards the 1.2000 level and 2017 lows. We need a move back above 1.2920 to stabilise and prompt a retest of last weeks peaks at 1.3075.
EURGBP – the 0.8940 level continues to cap any advances, falling back again last week after another failure to crack this key resistance. Still in the broad range and could slip back towards the 0.8820 area in the short term. Above the 0.8940 area argues for a move towards the August highs at 0.9100. Still in the broad range, with support also at 0.8740.
USDJPY – still in the uptrend from the lows this year but we need to break above 114.00 to keep upward bias intact. While below 114.00 the risk remains for a move below the 112.50 level and towards 111.80. The bearish weekly reversal of two weeks to go remains valid while below 114.20.