There was a lot to take away from last Friday’s US October jobs report, not least the fact that the headline figure was slightly disappointing at 214k, but overall it was enough to take some of the recent steam out of the US Dollar’s recent upward momentum. Given some of the recent data seen last week, expectations had been for a slightly higher number, and markets may have got themselves slightly ahead of the eight ball.
That being said the internals were still quite positive with the previously disappointing August jobs number revised up to 203k, from 180k, which meant that every jobs report since January had come in above 200k, while the unemployment rate dropped to 5.8%, and the labour force participation rate edged higher to 62.8%.
All in all another positive week for US equity markets resulted in fresh all-time highs in both the S&P 500 and the Dow and the third positive week in succession.
Since the sharp declines to the October lows the main US benchmarks have rebounded over 10%, the rather worryingly the Russell 2000 has not recovered to anywhere close to its previous highs.
While US markets continue to go from strength to strength the same cannot be said for the broader markets in Europe where fortunes were more mixed.
The FTSE 100 enjoyed a fairly good week, but the German DAX and other European bourses weren’t able to follow suit despite a unanimous reaffirmation of the pledge by ECB President Mario Draghi to expand the ECB’s balance sheet by €1trn over the next two years, in an attempt to stimulate the economy in Europe and fight deflation.
In the aftermath of last week’s ECB press conference investors had taken heart from the fact that whatever divisions there were on the ECB governing council, the unanimous reaffirmation of policy after last week’s reports of some disquiet about Draghi’s management style, meant that things had been smoothed over.
This always seemed a touch optimistic and was confirmed by comments from Bundesbank Jens Weidmann who stated that the balance sheet size expansion was merely a target and not an expectation. This, along with renewed concerns about a further deterioration in Ukraine and the risk of a significant escalation in the fighting saw European markets slide back as any form of relaxation of sanctions on Russia moved further and further away, as various parties continued to accuse Russia of orchestrating the increase in violence.
Looking ahead to this week, while geopolitical concerns are likely to continue to prevail, investors will be focussing on the latest Q3 GDP numbers from Germany, France and Italy at the end of this week, as well as the final October CPI inflation data from the wider euro area.
Chinese data also appears to be giving mixed signals, with the latest trade data at the weekend showing imports coming in below expectations, though exports to the US managed to hold up well, helping the broader numbers beat expectations, and widening the trade surplus to $45.4bn. The latest inflation data continues to point to weak prices with factory gate prices continuing to decline, a fall of 2.2% year to date in October.
October industrial production and retail sales data are not expected to improve on the weak September numbers staying at 8% and 11.6% respectively.
It’s also an important week for the UK with the latest quarterly Bank of England inflation report, as well as the latest unemployment and average earnings data, with a particular focus on the earnings data in the context of the recent sharp falls in oil prices which looks likely to bring the inflation rate down much closer to the wages data.
If there is any evidence that this gap might close further and even cross over, then expectations of a rate hike might start to increase again.
EURUSD – having made a new 2 year low last week at 1.2358 the euro snapped back sharply late on Friday to close well above 1.2400. This might delay the move towards 1.2040 and the 2012 lows. With short interest at its highest levels since 2012 the risk of a short squeeze towards the 1.2570 area remains. Any rebound would need to overcome the 1.2570 area to argue for a move back towards 1.2800.
GBPUSD – having made a low of 1.5795 last week we would need to see a fall below 1.5720 to target a sharper move lower. The current rebound needs to get beyond 1.5930 to suggest a move back towards 1.6070.
EURGBP – having held the 0.7800 level twice last week we could be set for a rebound towards the 0.7900 level. We need to get through the 0.7940 level to stabilise. A break below the 2012 lows at 0.7754 is the main obstacle to further declines towards 0.7690, the October 2008 lows.
USDJPY – we saw a tweezer top on the daily charts at 115.55 last week which suggests we might see a pullback towards 112.60 in the short term. Given the recent strength of the up move its not unreasonable to expect a pull back before a move higher to 120.00. Only a break back below 110.00 would have the potential to derail a higher US dollar scenario, towards 120.00
Equity market calls
FTSE 100 is expected to open 15 points higher at 6,582
DAX is expected to open 5 points lower at 9,286
CAC 40 is expected to open 4 points higher at 4,194
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