We didn’t hear anything out of yesterday’s ECB meeting that had the potential to undermine the second successive week of strong gains for European equity markets, in a week where we’ve seen commodity prices and equity markets break some key technical resistance levels.
We did see a minor pullback yesterday but that’s not unexpected given that the DAX is up nearly 10% in the last 2 weeks while the FTSE is up 4%.
Oil and iron ore prices also hit multi month highs with iron ore hitting $70 a ton its best levels since early 2015, while oil prices hit their best levels since November 2015, before retreating on reports that both Russia and Iran said they were prepared to open their oil taps wider. A rebound in the US dollar also didn’t help in the context of weakening the oil price.
As oil prices slipped back equity markets also fell back with them with US markets closing lower for the first time this week, while earnings misses for Microsoft (NASDAQ:MSFT) and Alphabet (Google (NASDAQ:GOOGL)) after the bell last night could well see a weaker open for European markets this morning.
There had been a broad expectation that ECB President Mario Draghi would adopt a rather more dovish tone than he did at yesterday’s press conference, but the main takeaway was a reiteration of a “wait and see” approach, or patience in terms of the overall effects of recent policy moves to support the economy in Europe.
Draghi spent some of his time defending the policy of negative rates and the independence of the central bank from German criticism that the bank was ignoring the concerns of pension funds and savers. Draghi also said that there was evidence that the ECB’s actions had improved borrowing conditions, something which does appear to be borne out by recent figures showing private loan growth, which is at its best levels since the end of 2011 at 1.6%.
There remains a concern that the recovery remains weak, a fact that was shown up in the most recent German and French manufacturing and Services PMI data for March.
Up until the Brussels terror attacks there had been some evidence of a recovery in the French services sector, when the flash number for March showed a brief improvement to 51.2, the best number since before the attacks in Paris towards the end of last year. Unfortunately this early pickup in March activity got snuffed out as the sector slumped back to 49.9, a marginal improvement on the February numbers.
Today’s latest flash April numbers for both the manufacturing and services sector for both Germany and France should tell us something about the resilience of both sectors in the wake of last month’s economic shock. Expectations are for a slight improvement in both the manufacturing and services sector in France but it is still expected to be tepid with manufacturing expected to show an improvement to 49.9 from 49.6, while services is expected to improve to 50.2 from 49.9.
In Germany, the services sector is expected to come in unchanged at 55.1, while manufacturing is expected to tick higher to 51, from 50.7.
EUR/USD – currently stuck in a range between the recent highs at 1.1440 and support at 1.1230. Only a move below 1.1030 argues for a move towards 1.0800.
GBP/USD – currently finding dips well supported but despite breaking above 1.4400 yesterday we were unable to get through the 100 day MA at 1.4450, sending us back down again. Currently has strong support down near the 1.4080 area.
EUR/GBP – last week’s bearish engulfing pattern suggests we could well see further weakness towards 0.7820 initially. A weekly close below the 200 week MA at 0.7930 has the potential to see further declines towards the 0.7600 area.
USD/JPY – having found some support at the 107.60 we are squeezing higher and could head back to the 110.20 area, and even the 111.00 area. While below the risk remains for a move closer towards the long term objective at 106.00.
Equity market calls
FTSE100 is expected to open 21 points lower at 6,360
DAX is expected to open 105 points lower at 10,420
CAC40 is expected to open 55 points lower at 4,570
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