We saw a positive end to the month for European markets, which posted their best gains of the year, with the notable exception of the FTSE100, which struggled to keep pace with its peers due to the underperformance of its large caps BP, Shell and AstraZeneca.
US markets finished mixed, with the Nasdaq 100 underperforming amid a rebound in yields, while the S&P500 had its strongest month since July last year and the Dow hit a new high for the year.
The US dollar also had its worst month of the year, although it did end the month on a strong note, as the “higher for longer” mantra that Fed officials had been so keen to push after the last meeting gave way to a series of sharply lower inflation numbers and fears that disinflation could force central bankers to reverse course in 2024.
The bigger question now is not whether more rate hikes are coming, but how many rate cuts we could see between now and 2024, and which central bank will be forced to blink first.
One of yesterday’s biggest decliners was the euro after economic data showed that the French economy unexpectedly contracted in Q3 and headline monthly inflation in France and Italy slipped into deflation in November, while year-on-year figures slowed more than expected.
EU headline CPI inflation also slowed more than expected to 2.4%, its lowest level since July 2021 and within touching distance of the ECB‘s 2% target.
Since August, EU CPI has slowed sharply from 5.3%, and at the current rate of decline could fall below 2% by early next year, potentially forcing the ECB to consider a rate cut, with markets pricing in that prospect as early as April.
As we head into the final month of the year, the focus today will shift back to the sclerotic Eurozone economy and the latest manufacturing PMI numbers for November.
The manufacturing sector in both Germany and France has been in contraction all year, with the last positive reading coming in the third quarter of 2022.
Activity in Spain and Italy has been slightly better, but even here we’ve started to see significant weakness.
In last week’s flash manufacturing numbers, economic activity in Germany and France diverged, with Germany improving from 40.8 to 42.3, while France deteriorated from 42.8 to 42.6. These numbers aren’t expected to change much with today’s final readings.
As for Italy and Spain, October saw a slowdown to 44.9 and 45.1 respectively, a sign that while the manufacturing sector was initially more resilient during the summer months, even here we are starting to see the effects of higher interest rates on economic activity, with Spain’s manufacturing sector expected to edge higher to 45.5 and Italy’s to 45.2.
In the UK, the picture is slightly better and has picked up each month since the lows in August, with expectations for an improvement to 46.7 from 44.8.
Across the Atlantic, the ISM manufacturing survey is also expected to improve to 47.8 in November, albeit from a similarly weak position, with prices paid forecast to rise to 45.9 and employment to 47.2.
Concerns over weak demand and an economic slowdown have also weighed on oil prices, with Brent falling for the second month in a row, despite OPEC+ agreeing to cut production by an additional 1 million barrels per day on top of the initial Saudi cut announced in April this year.The announcement of the new deal was immediately overshadowed by Angola breaking ranks and saying it would continue pumping as before, casting doubt on whether other OPEC members would do the same. Overshadowing the cut was the announcement that the U.S. reported its own record production of 13.2 million barrels per day, and the IEA said it expects the oil market to return to surplus next year.
EUR/USD – The failure to break through the 1.1020 level has caused the euro to fall sharply, bringing this week’s lows of 1.0852 into focus. A break of 1.0840 could signal a deeper slide towards 1.0670 and the 200-day SMA.GBP/USD – The failure at the 1.2720/30 level has triggered a sharp pullback towards the 1.2590 level. A break below 1.2570 signals a deeper pullback towards the 1.2460 area and the 200-day SMA.
EUR/GBP – Fell back to the 0.8615/20 area, with a break below the 0.8600 area signaling a sharp decline towards the 0.8540 area. Current resistance is at the 0.8670 level.USD/JPY – Managed to hold above the 146.65 area and has recovered through the 148.00 area, which in turn could see a return to this week’s highs in the 149.70/80 area.Below 146.60 the target is 144.50.The FTSE100 is expected to open 35 points higher at 7,488.DAX is expected to open 74 points higher at 16,289.CAC40 is expected to open 30 points higher at 7,340.
