CMC Markets Open: Europe set to open mixed as China worries continue

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By Michael Hewson (Senior Market Analyst at CMC Markets UK)

A late rebound in US treasuries saw US equity markets pull back from their lows in late US trading after some rather colourful comments from Dallas Fed chief Richard Fisher which compared bond traders to ?feral hogs? and warning the markets against thinking that the Fed could be bluffing with respect to its tapering talk.

This late pullback is unlikely to see Europe’s markets start the day in confident mood this morning, given that investors here still have one eye on events in China as the central bank continued with its reluctance to pump extra liquidity into its banking system, as it attempts to rein in irresponsible lending by its domestic banks.

US bond markets certainly believe that the Fed is serious about tapering given the over 30% rise in yields, from 1.93% to 2.53% since Ben Bernanke suggested the Fed was moving in that direction on the 22nd May.

US stock markets on the other hand seem to be reacting somewhat better to the prospect of Fed tapering than overseas markets which have endured double digit percentage drops from their recent highs, in contrast to the single digit falls of the S&P500 and the Dow Jones.

The FTSE100, for example has fallen over 800 points from 14 year highs, in only 24 trading days, as has the German DAX, though it could be argued that some of these losses have the added worry of concerns about China and the feeble European economy to contend with as part of the overall mix.

When these China and local concerns are added to the fact that the world’s biggest central bank is preparing to turn off the liquidity tap, then investors not unreasonably are likely to cash in some of their chips, especially when there is little likelihood of another central bank, like the ECB, prepared to fill the potential vacuum.

Today’s economic data out of Europe is likely to reinforce the bleak economic outlook with the final Dutch Q1 GDP numbers which are expected to be confirmed at -0.1%, while Italian retail sales for April are expected to decline 0.1%, a slight improvement on March’s 0.3% decline.

It remains, somewhat perversely, the likelihood of continued improved US economic data that could well drive further declines in stock markets in the longer term with a host of economic releases due out today starting with May durable goods orders which are expected to rise 3%, probably helped by increasing aircraft orders.

The state of the housing market will also be analysed for continued improvements with the latest Case-Shiller report as well as new home sales for May expected to rise 1.3%, down slightly from April’s 2.3%.

Even the recent decline in stock markets we could see June consumer confidence take a knock and come down from 76.2 to 75.0, while the latest Richmond Fed survey is expected to show an improvement in June, back to positive territory of 1, from -2 in May.

Also on the docket today outgoing Bank of England governor Mervyn King makes his last ever appearance to MP’s at the latest inflation report hearings ahead of Mark Carney’s arrival next week.

EURUSD ? the euro managed to hold above the converging 50,100 and 200 day MA supports which all converge between 1.3070 and 1.3085, which suggests scope for a rebound. A clear close below all three argues for a sharp move back towards the 1.2920 level, trend line support from the May lows at 1.2800. To stabilise the euro needs to get back above the Friday highs at 1.3250, and we could well see a squeeze back to these levels..

GBPUSD ? despite a brief push below the 50 day MA at 1.5385 the lack of follow through appears to suggest we could squeeze back towards the Friday highs at 1.5530. The long lower shadow on yesterday’s daily candle suggests the market could be a little short sterling.

There is also some support at the 100 day MA at 1.5320. We need a pullback through 1.5530 to retarget the 1.5620 area.

EURGBP ? the euro continues to find support between the 0.8480 and 0.8490 area which has been pretty much the base for the whole of June. The broad range trade continues to confine the price action with resistance remaining anywhere near to the 0.8600 level and the 0.8410 March and April lows being the multi day support on the down side.

USDJPY ? a late pullback in US treasury yields saw the US dollar slip back from the 98.60 yesterday and as such keeping a lid on the current advance towards the 99.20 area and 50 day MA.

The top of the cloud resistance continues to move away now at 100.90 with the base of the cloud at 97.95 and while we struggle to move higher we remain at risk of a pullback towards 95.80, having failed to take out the 98.50 area yesterday.

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