Last week saw another positive session for European markets, with the DAX closing higher for the 7e consecutive week and its highest levels since early June, and a 5-month high.
The FTSE100 also managed to end the week higher, posting a 2-month high in the process, although it continued to struggle to move well above the 7,400 level.
Since October lows, European markets have rallied on expectations that potential interest rate hikes will not be as high as believed to be the benchmark a few weeks ago. , although we can expect to see a weaker opening today, as rising Covid infections in China lead to tighter controls and weakness in Asian markets.
While this may be true in the US where the headline CPI has been slowly rising at a slower pace since June, it is certainly not the case in Europe and the UK, where it has continued to remain on a upward trajectory.
U.S. markets have performed quite more unevenly since their October lows as investors absorbed comments from St. Louis Fed President James Bullard, who said the Federal Reserve needed to go much further. in the rise in rates, affirming that to really control inflation the terminal rate should rise between 5% and 7%. This is much higher than the current target level for the markets of just over 4%, and although US markets ended the week lower, they still ended the day higher.
Bullard’s comments were all the more surprising given that there has been a clear trend since June of lower US inflation, helped by the aggressive nature of the Federal Reserve’s response since March, as well as a dollar US stronger, which seems to have escaped the attention of Fed Governor Christopher Waller, who said last week that it would take more than one CPI report for the Fed to reverse its policy of rise. Someone should point out to him that the October reading was the weakest CPI print since January.
Unlike the Federal Reserve, which seems determined to raise US rates, the European Central Bank, as well as the Bank of England, seem more reluctant to do so despite weaker currencies acting as a drag on their own economies and as a tailwind for their own domestic inflationary pressures.
Nonetheless, the euro and pound managed to hold onto recent gains from lows seen in late September, with the pound proving remarkably resilient, despite a bleak economic outlook for the UK economy over the next two to three years. .
Last week, the UK CPI hit a new high of 10.7% for October, while the EU CPI was confirmed at 10.6%.
Nonetheless, continued uncertainty over what the Federal Reserve is likely to do over the next two to three months appears to be the main factor behind the more resilient tone in equity markets, even as US markets ended the week last down.
Falling energy prices also support talk that inflation may have peaked in the near term, helping to temper rate hike expectations despite Bullard’s unexpectedly hawkish tone late last week. .
U.S. oil prices fell 10% last week as rising covid cases in China fueled demand concerns over the winter months, while Brent prices fell by 9%.
Recent weakness in energy prices is one of the few silver linings markets have been able to hold on to in recent weeks, with natural gas prices also falling quite sharply in recent weeks.
Natural gas prices in the UK, for example, have fallen sharply since their peaks in August, falling by more than 70%, and the situation is similar for gas prices in Europe.
Despite this weakness in energy prices, there has been little evidence that inflation is slowing in Europe. In August, the German PPI reached a record high of 45.8% and remained at this level in September. If we want to start seeing evidence that inflation is easing, that’s where we need to see it, with today’s October PPI numbers expected to return to 42.1% on an annualized basis.
On a monthly basis, the German PPI increased by 7.9% in August, then by 2.3% in September. For October, we expect to see another, albeit more modest, increase of 0.6%.
EUR/USD – currently capped at 1.0400 and the 200-day SMA zone. A close above 1.0430 is needed to rally towards the 1.0600 area. Support up to 1.0180 area.
GBP/USD – still have resistance near the 1.1960 level. The 1.2030 area remains the broader resistance. This is likely to be a huge barrier to any additional gain. Support remains till 1.1640/50 area.
EUR/GBP – remains under pressure with a break below the 0.8670/80 level opening the possibility of further losses towards the 100-day SMA.
USD/JPY – are currently struggling to move past the 141.00 area. Break through this level to minimize the risk of a return to the recent lows at 137.65.
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