After five successive down days US markets finally arrested their recent slide last night helped by a continued improvement in weekly jobless claims, while Asia markets have traded sideways despite Japanese inflation hitting five year highs, showing that the policies implemented by Shinzo Abe are starting to bear fruit, at least on the CPI side.
While yesterday’s rebound is certainly welcome investors thoughts are never too far away from the political wrangling in Washington, as well as indecision about when the Fed may consider starting to taper its asset purchase program.
With this in mind Europe’s markets look set to open slightly higher having largely shrugged off the concerns in Washington as investors become more confident about Europe's recovery.
While there is no question that some of Europe’s markets are undervalued yesterday’s sharp move lower on the FTSEMib is a sharp reminder, if any were needed, of the political sink holes dotted around Europe, which are no doubt keeping some of these regional markets undervalued.
The recent rise in the Italian market has seen the index touch its 200 week MA for the first time since 2008, with the prospect that a sustained break higher could well signal further gains.
Any gains will need to be set not only against a fractious political backdrop, but also at a time when some of the Italian economic data is starting to show signs of life, as PM Letta flies back from the US as once again we got renewed threats to topple the government by Berlusconi party members, if next week’s Senate vote on expelling Berlusconi, goes against them.
Next week we have Spanish and Italian PMI's which have been improving, European, Italian and Spanish unemployment which appears to have reached a plateau for now, as well as the latest ECB rate meeting, where Draghi may be forced to try and talk down the euro.
Amidst all this uncertainty the Italian cabinet is due to vote on a rise in VAT today to offset the changes made in scrapping the property tax, which was opposed by Berlusconi’s PDL party, as well as looking to sell €6bn worth of 10 year bonds today. The timing of this auction is particularly unfortunate given yesterday’s 10 point rise in 10 year borrowing costs.
Back in the US after yesterday’s weekly jobless claims boost we get the latest personal income and spending data for August, which are expected to improve, though given the poor performance in retail sales data and the recent slide in consumer confidence it would be a surprise to see a significant jump in personal spending. Nevertheless expectations are for an improvement in both from July’s 0.1% rise to a rise in 0.3%.
In reality markets are more focussed on next weeks US payrolls, ISM and ADP data back in the spotlight after the recent no taper decision by the Fed. Some are speculating we could get a taper in October, after Bullard's comments recently but I think that’s doubtful given recent data.
One payrolls number is unlikely to shift the dial that much. I'm still of the view that December remains the earliest we can expect an adjustment to the program, and even then it is likely to be a token.
While political dysfunction in Washington could well see the Dow and S&P500 post their first negative week since the end of August, we still look set to finish the month and the quarter in firmly positive territory, so it's important not to lose perspective.
EURUSD – progress to the upside continues to remain limited, however while the 1.3420 area remains intact then a retest of last week’s high at 1.3570 remains possible, and then on to 1.3710. Only below the 1.3420 area, argues for a retest of the lows last week at 1.3320.
GBPUSD – while the 1.5980 area remains intact then a retest of last week’s highs and then 1.6310 remains possible. The risk is that a sustained break below 1.5980 could suggest a move towards the lows last week at 1.5880 and the medium up trend support now comes in at 1.5755 from the 1.4815 lows.
EURGBP – the 0.8390 area continues to come under pressure but has so far remained impervious to further downward pressure. On the upside the 0.8470 area remains a key resistance and we need to see a move above the 0.8500 area to retarget the 200 day MA. The risk remains towards the downside and a test of the 0.8280 area, the 50% retracement of the 0.7755/0.8815 up move. A move back below the 0.8390 area would suggest that this move could be about to unfold.
USDJPY – while US treasury yields remain soft, the US dollar will struggle to rally strongly. While below the 100.00 level the risk remains for a retest of the trend line support at 97.70 from the June lows at 93.85, as well as the daily Ichimoku cloud support last week. Only a move below this trend line suggests further losses towards the 94.00 area. We need to see a move above the highs two weeks ago at 100.60 to retarget the 103.70 area.
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