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After an initially positive start European markets finished the day lower after as the sugar rush from reports of a large-scale Chinese stimulus plan, gave way to scepticism that it would be enough to deliver the help needed when what is needed is proper economic reforms as opposed to more liquidity.
US markets underwent another record-breaking session with the Nasdaq 100 and S&P500 securing new record highs, while the Dow finished the day lower, as Netflix beat expectations after the closing bell on its Q4 numbers.
Last night’s positive finish in the US looks set to see markets in Europe open higher again today, though we could well struggle to hang onto the gains if recent experience is any guide.
If the ECB ever had a reason to think about cutting rates, then today’s manufacturing and services PMIs would offer a compelling reason but for the fact that headline inflation is at 2.9% and core inflation is at 3.4%, and policymakers have insisted that tackling prices is their priority.
Let’s see how if that consensus holds out tomorrow when the ECB meets for the first time this year.
Over the last 15 months both the French and German manufacturing sectors have been very much in recessionary territory when it comes to economic activity. Last month France manufacturing hit its lowest levels since the Covid lockdowns at 42.1, while in Germany we saw a modest improvement to 43.3 from 42.6, having been as low as 38.8 in July last year.
We are expected to see modest improvements in today’s January flash numbers but nothing to suggest a significant uptick with expectations of an improvement to 42.5 and 43.7 respectively.
Service sector activity hasn’t been much better with France edging up to 45.7 in December having been as low as 44.4 in September. German services activity does appear to be showing a little more resilience but was still subdued at 49.3 in December and is expected to come in unchanged.
The UK economy on the other hand despite its many challenges has shown slightly more resilience but has struggled as far as manufacturing is concerned, sliding to 43 in August last year, although we have seen a slight improvement since then, although we did slow to 46.2 in December.
The whole of Europe and the UK has been in a manufacturing session for over a year now, while the services sector has also struggled. On services the UK has shown slightly more resilience rising sharply at the end of last year to 53.4 from 50.6. While welcome, this somewhat jars against what we saw in December retail sales which plunged -3.2%. Today’s January services flash PMI is expected to show a slowdown to 53.
We also have the Bank of Canada rate decision which is expected to see the central bank keep rates unchanged at 5%, with the likelihood we could see a hawkish bias, after headline inflation in December ticked up to 3.4% and hourly wages for permanent employees jumped from 5% to 5.7%..
EUR/USD – At risk of sliding towards the December lows at 1.0720, having slipped below the 200-day SMA at 1.0830. Currently capped at the 50-day SMA with main resistance up at 1.1000.
GBP/USD – Pushed up towards 1.2750 yesterday before slipping back with support at the 50-day SMA as well as the 1.2590 area needed to hold or risk a move lower towards the 200-day SMA at 1.2540. We need to get above 1.2800 to maintain upside momentum.
EUR/GBP – Still finding support at the 0.8540/50 level which has held over the last 2-months. A fall through here could see further falls towards the 0.8520 area. We still have resistance at the 0.8620/25 area and the highs last week.
USD/JPY – Edged beyond the 148.50 area towards 148.80 as it looks to close in on the 150.00 area. Pullbacks likely to find support at the 146.25 level cloud, as well as the 50-day SMA.
FTSE100 is expected to open 24 points higher at 7,509.
DAX is expected to open 108 points higher at 16,735.
CAC40 is expected to open 34 points higher at 7,422.
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