After last week’s big gains, European markets spent yesterday taking a bit of a break, with the FTSE100 ending the day flat, while the FTSE 250, DAX and CAC 40 all slipped back.
US markets also spent most of yesterday treading water, with gains tempered by a sharp rebound in bond yields as some of last week’s Fed-induced and jobs report euphoria faded.
The jury remains out on whether the U.S. economy is facing a hard or soft landing after the Fed’s Senior Loan Officer Survey showed that demand for credit in the economy is weakening, while markets were also looking ahead to a $48 billion 3-year note auction. Today’s auction will be followed by a $40 billion 10-year note auction tomorrow and a $24 billion 30-year note auction on Thursday, which could put further upward pressure on yields.
We’ll also be hearing from several Fed speakers in the wake of last week’s decision to hold rates, including Minneapolis Fed President Neel Kashkari, who has been one of the more vocal hawks on the FOMC in recent months, so his thoughts on last week’s decision could be particularly instructive in the context of whether he thinks monetary policy is restrictive enough, or whether we could see another hike in the coming weeks.
Today’s Asian session has had to absorb China’s October trade numbers as well as the latest monetary policy decision from the Reserve Bank of Australia, with markets there falling sharply, which is expected to translate into a lower European open.
In recent comments, RBA Governor Bullock stated that the Australian central bank has a very low tolerance for any deterioration in the inflation outlook after the latest inflation number showed a slight overshoot.
At the last meeting in October, interest rates were left unchanged at 4.1% and it was made clear that further rate hikes may be necessary due to sticky services inflation, although the economic outlook remains very uncertain.
There was an expectation that we could see another 25bp hike due to the stickiness of services inflation, and given these concerns, the RBA acted on them this morning, raising the cash rate to 4.35% after 5 months of holding it at 4.10%. In a sign that this may well be the last hike, the guidance was changed from “further monetary policy tightening may be needed” to “whether monetary policy tightening may be needed”, sending the Australian dollar sharply lower.
Of course, given the weakness in the Chinese economy and Australia’s exposure to it, there is a risk that the RBA may be overcompensating.
While the latest Chinese Q3 GDP numbers showed a pickup in economic activity, today’s October trade numbers showed little sign of a pickup in economic activity.
Today’s Chinese import data broke a streak of 10 consecutive negative months with a 3% increase, perhaps a sign that domestic demand is returning, beating forecasts for a 5% decline. More worrisome, however, was a larger than expected drop in exports, which fell -6.4%, the 6th consecutive month of decline, and a worrying sign that global demand remains weak and isn’t likely to pick up soon.
EUR/USD – Quiet session yesterday with major resistance in the 1.0800 area and the 200-day SMA, which should be a tough nut to crack. Support is likely to come in at the 1.0670 level. Below 1.0520, the pair targets the 1.0450 level.
GBP/USD – Pushed up to the 200-day SMA at 1.2430 before pulling back. We need to break above 1.2450 to signal further gains. Any pullbacks should find support in the 1.2270/80 area.
EUR/GBP – Dropped through the 0.8680 area and bounced back from the 0.8650 area. We could see a move up to the 0.8720 area, but are still on course for a move towards the 0.8620 area.
USD/JPY – The pair bounced off support at the 148.75 level and could go as low as 150.30. We also have resistance at 151.95 and last week’s highs.
The FTSE100 is expected to open 7 points lower at 7,410.
DAX is expected to open 26 points lower at 15,110.
CAC40 is expected to open 27 points lower at 6,986.
