Draghi caution gives markets pause

The rally in stock markets seen in January appears to have run into a bit of turbulence with all European Indices now in negative territory year to date with the notable exception of the FTSE100.

Granted the economic data hasn’t been good but Germany has shown some signs of a recovery in Q1, yet the DAX has also slipped back sharply, and there is a risk that this week’s declines could herald a steeper pullback, if sustained.

This morning’s news from beleaguered French car maker Peugeot serves as a timely reminder of the problems facing Europe as the company struggles to stem losses from a European car market that is suffering significant competitiveness problems.

We could well get further evidence of a pickup in Germany with the latest trade surplus numbers for December later this morning, in the wake of China’s good numbers earlier today, which could well see a higher open this morning.

On the flip side of that Italian industrial production is expected to show a 7.3% decline year on year.

The overall mood yesterday certainly wasn’t helped by Draghi’s rather downbeat comments yesterday, but in some ways he has helped because the last thing Europe needs right now is a stronger currency. His comment that currency values should reflect fundamentals is a sound one; however that is a tricky balancing act when talking about the euro given the widely diverging fundamentals between Germany and the rest of Europe.

Draghi’s comments that economic weakness in the euro area was expected to prevail into the middle of this year were slightly more downbeat than the markets had expected, however given the events unfolding in Spain and Italy it can’t have come as too much of a surprise.

The fact is that as Draghi himself suggested the biggest risk to growth comes from slow implementation of reforms from governments and geo political issues, and with the Italian election looking more and more uncertain with respect to the outcome, things could well be about to get interesting again in Europe.

In any case the recent rally in markets, while good for sentiment, hasn’t really been backed up by solid evidence of a pick up in economic growth, with the exception of some positive German data.

Even in the US, concerns about growth are starting to increase after the Q4 contraction in GDP and yesterday’s Q4 productivity numbers showed a 2% drop, while labour costs rose 4.5%.

While it is easy to dismiss the Q4 growth number as a blip due to one off factors, the sharp decline in US consumer confidence in January suggests that the consumer is starting to retrench as US politicians continue to argue about spending cuts against tax rises.

EURUSD – yesterday’s decline has seen the scenario of a euro pullback continue to play out as suggested by Monday’s bearish candle. Initial support is likely to come in around the January lows at 1.3250, while the long term trend line support at 1.3150 from the 1.2045 lows is the major line in the sand for this uptrend. Any rebound is likely to find resistance at 1.3490, and behind that at 1.3600.

GBPUSD – the pound continues to hold above trend line support at 1.5645 from the 1.3500 lows in 2009, however the lack of any sort of conviction in any rebound suggests a break could well see a retest of the 2 year range lows at 1.5270 on a break below 1.5600.
The pound needs to close back beyond the 200 day MA at 1.5910 to stabilise and diminish the downside risk.

EURGBP – the 200 week MA at 0.8525 remains the key support here and a failure to hold above here on a weekly close could well precipitate a sharp sell off next week towards 0.8425.
If we close above 0.8525 then we could well see a retest back towards 0.8580 initially and then the highs at 0.8715.

USDJPY – have we found a top at 94.00 the 38.2% of the down move from the 2007 highs at 124.15 to 75.30. We also have resistance at 95.00 which is the 2010 highs.
Only below the 90.30 level argues for a deeper correction towards key support at 87.50.