Europe to open lower after late US slide.
By Michael Hewson (Chief Market Analyst at CMC Markets UK)
It’s not really clear what the main catalyst for yesterday’s sell off in US markets was. Some have speculated that it was President Obama’s robust denunciation of Russia’s actions in Crimea, and the consequences of doing nothing that pulled the rug from the recent run higher in equity markets.
The US President warned of the perils of “casual indifference” in a powerful speech rebuking EU leaders for not doing enough to hold President Putin to account, and warned that the US was prepared to get tougher if Russia was tempted to push its luck further.
While this may be true and is probably the main reason for the weaker finish, the US President was hardly likely to say anything else, with markets being driven higher over the last couple of days by hopes of fresh stimulus from China and Europe.
There could well have also been another catalyst, a little less obvious perhaps, in the form of yesterday’s disappointing underlying durable goods number, despite a good headline number, appeared to suggest that despite rising consumer confidence, demand in the US economy at the consumer level still remains sluggish.
This alone has the potential to raise a red flag with respect to forward earnings potential, and while on the margins is not enough to prompt a sharp selloff, certainly has the capacity to limit further gains, with US markets near record highs.
Today’s US Q4 GDP revisions aren’t likely to shift the dial that much with respect to the condition of the US economy given it is pretty much rear view mirror stuff. Expectations are for an upward revision from 2.4% to 2.7%, which is likely to have been driven by an upward revision to personal consumption to 2.8% from 2.6%.
Weekly jobless claims are expected to remain steady at 325k, while pending home sales for February are expected to remain weather affected declining 8.5% year on year.
Due to last nights weak US finish we can expect to see a weaker European open this morning as fickle investors continue to try and determine the next move in these sentiment driven rangy markets.
Banks in particular are likely to be in focus after the decision last night by Fitch to lower the outlook on 18 European banks, including Deutsche, Societe Generale and Unicredit, signalling the potential for downgrades in the future as a result of the transition to a single resolution mechanism, which would break the state support link between banks and sovereigns, with France a particular concern.
While in the US, the Federal Reserve rejected the capital plans of five large banks including Citigroup as well as the US units of HSBC and Royal Bank of Scotland, under new stress test scenarios. The affected banks must take action and resubmit their plans as soon as possible.
The main focus this morning is likely to be on the latest UK retail sales numbers for February which are expected to show an improvement from January’s sharp 1.5% decline.
A rebound of 0.5% is the current consensus view but given the weather seen in that month the margin for error is likely to be quite variable. February was a month that saw some heavy discounting from retailers and a very strong BRC sales number of 37 for that month, which could suggest a higher ONS number.
Whatever the number it could well act as a strong indicator to the level of Q1 GDP, particularly in light of the decline seen in January’s numbers.
EURUSD – continues to ping around in the range between support at 1.3750 and the recent highs just above 1.3820, but we need a break through the 1.3850 level to stabilise and suggest a retest of the recent highs at 1.3970. Below 1.3750 targets a move towards 1.3640. The 1.4000 level remains a key psychological barrier to a move towards 1.4200.
GBPUSD – yesterday’s rebound has brought us back through 1.6570 towards a minor resistance level at 1.6605. If we hold above 1.6560 there’s good chance we could well retest the highs of a week ago at 1.6650.
Only a move below 1.6460 suggests the possibility of a move towards the 100 day MA 1.6435. A break below 1.6425 opens up the road for a move towards 1.6300.
EURGBP – the failure to push through 0.8400 has brought the euro back on a run lower with a good chance that we could well be back on our way towards the 0.8270 level. We could get a pullback towards 0.8340 in the interim though if we can’t push through the 0.8300 level. As such the bearish engulfing candle seen last week remains intact. The resistance at the 200 day MA at 0.8420 remains a key obstacle to further gains.
USDJPY – the rebound seen over the last week or so needs to get back above the 102.70/80 area or run the risk of a revisit of the 101.20 area which has acted as strong support for the whole of March.
As such the risk remains on the downside while below the 103.00 area. The focus still remains on the February lows at the 100.70/80 level. The 200 day MA is also a key level at 100.35
Equity market calls
FTSE100 is expected to open 30 points lower at 6,575
DAX is expected to open 36 points lower at 9,413
CAC40 is expected to open 22 points lower at 4,363
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