European markets had another positive day yesterday, with the DAX hitting another record high, while the FTSE100 broke 2 days of declines to close higher as well.
The outperformance in European markets appears to be driven by a growing belief that the European Central Bank may be forced to cut interest rates sharply in early 2024 in response to sharply slowing inflation and a sclerotic economy.
Bond yields have fallen sharply in recent days, reflecting a growing belief among investors that central banks will start cutting rates as early as the second quarter of next year, rather than holding them higher for longer.
The change in tone has been most noticeable from several ECB policymakers who have indicated that rate hikes are done.
US markets also appear to be running out of steam after their big November rally as traders take stock of the resilience of the US economy.
Asian markets, on the other hand, have struggled with the latest set of Chinese trade numbers pointing to an economy that is still struggling, and a downgrade by Moody’s on China’s credit outlook, along with downgrades to banks and other small companies, which is likely to weigh on this morning’s European open in the wake of weakness in Asian markets.
In October, Chinese import data broke a streak of 10 consecutive negative months by rising 3%, perhaps indicating a return of domestic demand, beating forecasts for a 5% decline.
Slightly more worrying was a bigger than expected drop in exports, which fell -6.4%, the 6th month in a row they’ve been lower and a worrying sign that global demand remains weak and unlikely to pick up soon. Today’s November numbers saw imports fall -0.6% versus expectations for an increase to 3.9%, a sign that domestic demand is still very weak, while exports improved, rising 0.5%, a solid rebound from October’s -6.4% decline.
Yesterday’s US ADP payrolls report showed that job growth slowed to 103k in November, a further sign that the labor market is slowing, with the last 3 months showing clear signs that hiring is slowing.
This trend was also reflected in this week’s drop in job openings in October to 8.7 million, the lowest level since March 2021.
For the time being, weekly jobless claims have shown little sign of rising, trending in the low 210k range for the past couple of months.
Continuing claims on the other hand have been edging higher, rising to a 2-year high of 1.93m last week.
Today’s claims are expected to come in at 220k, with continuing claims also expected to remain steady, ahead of tomorrow’s highly anticipated Non-Farm Payrolls report.
EUR/USD – Continues to slide lower, raising the prospect of a move towards the 50-day SMA just below the 1.0700 level. Resistance now lies at the 1.0825 and 200-day SMA, while above that at the 1.0940 area.
GBP/USD – The pair remains under pressure as it continues to slip away from the 1.2720/30 area. A break below 1.2570 signals a deeper pullback towards the 1.2460 area and the 200-day SMA. A move through the 1.2740 area signals a move towards the 1.2820 area.
EUR/GBP – While below the 0.8615/20 area, the risk remains for a move towards the September lows at 0.8520 and possibly further towards the August lows at 0.8490.
USD/JPY – Currently trying to bounce off the recent lows in the 146.20 area, with resistance now in the 148.10 area. Looks vulnerable to further losses while below this cloud resistance with next support at the 144.50 area.
The FTSE100 is expected to open 29 points lower at 7,486.
DAX is expected to open 52 points lower at 16,604.
CAC40 is expected to open 24 points lower at 7,412.
