Easy money was flowing and all was well again in global stock markets by the end of last week. A strong hint of further easing from the European Central Bank to come in December topped off with a rate cut in China saw the FTSE 100 and German DAX touch two-month highs. Following the gains, a mixed open is expected on Monday.
A bout of better than expected technology company earnings from Alphabet, Amazon (O:AMZN) and Microsoft (O:MSFT) helped a US stock market rally that put the S&P 500 back into positive territory for the year. A strong earnings report from Apple (O:AAPL) this Tuesdaymight be enough to carry the Nasdaq 100 to new record high this week.
Having eased monetary policy back to levels last seen in the 2008 financial crisis in response to 6.9% GDP growth, below the country’s target of 7%, Premier Li Keqiang back-tracked in a speech over the weekend, saying China never said the economy must grow at 7%.
While stocks soared following the dovish shift from the ECB, the euro tanked to a two-and-a-half month low. The market reaction may be a little over the top; the ECB has not done anything yet. A statement saying the ECB governing council will “re-examine” the level of monetary accommodation doesn’t mean that the examination will conclude anything needs to be done. Consumer Price Inflation data for the Eurozone released this Friday will surely be a large chunk of what the ECB evaluates before its December meeting. ECB board member Yves Mercsh may have something to add at a talk in Brussels today.
Members of the FOMC would likely argue that a rate cut from the ECB or PBOC doesn’t influence the decision to raise interest rates in the United States. It may not affect the decision to do it, but it must surely impact the timing. In the light of easier policy in Europe in China, were the Fed to raise rates either this week or in December, the divergence in monetary policy would surely cause an even bigger reaction in the US dollar. If the ECB were to cut interest rates or expand quantitative easing at its next meeting on December 3, stock markets might accept that the Fed has passed the baton to the ECB and look past the Fed hiking at its meeting on December 15/16.
There is the small issue of the October Federal Reserve meeting this Wednesday to consider before we get to December. However, a rate hike seems almost impossible at this week’s meeting. There’s no press conference to explain the decision and if it does happen, it will have been one of the most poorly signalled moves in recent Fed history.
Business confidence in Germany is expected to decline slightly in October for the first time in four months according to data to be released by the IFO on Monday.
EURUSD – Having again failed to sustain life above 1.15, the euro has dived sharply in the ensuing six days, dropping 500 pips. The pair has fallen through potential support at 1.11 from the September 3 & 23 lows as well as rising trendline support through the March 13 & July 20 lows. Prior support at 1.11 could now be resistance with 1.08 next possible support.
GBPUSD – Cable has closed back beneath its 200 DMA after failing to break through 1.55. In doing so it has also dropped back through a broken downward RSI trendline, opening further downside momentum which could carry the pair back to 1.52, the October 13 low.
EURGBP – Euro-sterling has dropped back through the 200 DMA and below 0.72 and made a new lower low and broken RSI support from 45. Support from the Aug 12 peak at 0.7170 could be enough to create a dead cat bounce back towards the 200 DMA.
USDJPY – Dollar yen broke resistance from 121.20 but needs to close above the Aug 31 peak to suggest it has finally broken its 118-121 range.
Equity market calls
FTSE100: to open 18 points lower at 6,426
DAX: to open unchanged at 10,794
CAC40: to open 6 points lower at 4,917
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