After 3 consecutive monthly declines, there was always the possibility that we would see a bit of a bounce at some point.
The surprise was that it came in the last 3 days of last week, at a time when the war between Israel and Hamas shows little sign of winding down.
There were a number of catalysts, with the Federal Reserve at the heart of it, while the US bond market also saw a big rebound after the US Treasury outlined lower than expected bond issuance for the quarter. Add to this a Goldilocks non-farm payrolls report and a couple of disappointing US ISM reports, and US 10-year yields saw their biggest weekly decline since March as markets began to price in the prospect of rate cuts sometime in the summer of next year.
While the markets were revising their estimates for when US rates might start to be cut, economic data in the UK and Europe pointed to an even deeper economic malaise, as for all the hawkishness of both the ECB and the Bank of England, it was starting to become clear that they were both done on the rate hike front, and that we could see rate cuts from the ECB as early as Q1 next year, and from the Bank of England sometime in H2 2024.
This shift was most evident in the FTSE 250, which had its best week of the year, rising 6.6%.
US markets also rallied strongly and had their best week of the year, with the Nasdaq 100 closing up 6.48%, the S&P500 closing up 5.85% and the smaller cap Russell 2000 closing up 7.5%.
Friday’s payrolls report showed that unlike September, when the U.S. added 297,000 jobs, job growth slowed to 150,000 in October, the weakest number this year, while the unemployment rate ticked up to 3.9%, a sign that the U.S. economy is now starting to slow in a way that will please the U.S. Federal Reserve.
Crude oil prices also came under pressure, falling for the second week in a row and now back to levels seen before the Hamas terrorist attacks on Israel, after the leader of Hezbollah in Lebanon claimed no prior knowledge of the attacks, suggesting little appetite for further involvement in the conflict.
This reluctance to get involved beyond rhetoric has raised hopes that the conflict will remain contained for the time being, meaning that demand concerns have returned to the forefront against the backdrop of weakening economic data.
Chinese economic data continues to look weak if recent PMIs are any guide, and with October trade figures due tomorrow, the outlook for the world’s second largest economy looks lackluster.
In Europe, today’s services PMIs are expected to reinforce this weak demand outlook after the flash numbers from Germany and France at the end of October.
In France and Germany, the flash services activity readings were solidly in contraction territory at 46.1 and 48 respectively, with Spain and Italy also expected to remain lackluster at 49.3 and 47.7, down from 50.5 and 49.9 in September.
Asian markets have continued Friday’s positive theme, while European stocks are expected to open mixed as they look to consolidate last week’s gains.
EUR/USD – Pushed above the 50-day SMA as well as the 1.0700 area, potentially opening up the 1.0800 area and the 200-day SMA, which is likely to be a tough nut to crack. Support is likely to come in at the 1.0670 level. Below 1.0520, the 1.0450 level is the target.
GBP/USD – Broke through the 1.2200 level and the 50-day SMA at 1.2300 last week, opening up the prospect of a move towards 1.2420 and the 200-day SMA. Support at 1.2270/80.
EUR/GBP – Dropped through the 0.8680 area with a break now targeting the 0.8620 area. Resistance at the recent highs at 0.8740.
USD/JPY – Continues to retreat from 151.95 resistance, dropping below the 149.80 area. 3 consecutive daily declines could see a move back to the 148.75 level or the 147.85 area.
The FTSE 100 is expected to open 5 points lower at 7,412.
DAX is expected to open 5 points higher at 15,194.
CAC40 is expected to open flat at 7,047.
