The FX, equity and commodity markets have started the new week fairly quietly. In fact, this week looks set to be a quieter one for global macroeconomic data releases and other fundamental events. The Presidents' Day in the US means Wall Street will be shut for trading today while Chinese investors will be away until Thursday in celebration of the Spring Festival. Among the key data publications will be the latest Eurozone PMIs and UK wages data on Wednesday, and later in the week we will have UK GDP (Thursday) and Canadian inflation figures (Friday). In addition, we will have the respective minutes from the latest policy meetings of the RBA (Tuesday), Fed (Wednesday) and ECB (Thursday) all released during the week. On a micro front, it set to be a massive week for UK stocks in particular with HSBC, BHP, Glencore, RBS, Barclays and Lloyds being among the companies reporting their earnings results throughout this week.
But just because the economic data will be largely quiet, it doesn’t necessarily mean the markets will. We will continue to watch the bond and equity markets closely in order to gauge investors’ appetite – or lack thereof – for risk. Last week saw the equity markets – especially in the US – stage a sharp rebound, paring a significant chunk of the losses during the first full week of February. In Europe, the gains were not spectacular as a soft dollar kept the GBP/USD and EUR/USD underpinned, which undermined stocks sensitive to the exchange rate. The equity market bulls will want to see the indices trade and hold above last week’s range, while failure to do so could see the sellers emerge once again and drive the markets lower.
Housing market concerns drag FTSE lower
With the upcoming UK earnings, the FTSE will be among the closely-watched indices this week. Today, the index was hit by a 5% drop in shares of Reckitt Benckiser Group after the British household goods company reported flat sales growth for 2017. Housebuilders were also lower after Rightmove Housing Index showed a slowing in growth in house prices. It looks like there’s a bit of caution creeping into the UK housing market as the buyers probably wait to see if lower immigration as a result of Brexit will mean the vendors will reduce their asking prices.
UK wages and GDP could move GBP, UK stocks
Could the FTSE find good support from a potential drop in the pound? The GBP/USD has rallied to its pre-Brexit levels of above 1.40 in recent weeks as the dollar sold off. However, with the recent improvement in US macro pointers, there is a good chance that the greenback could bottom out soon. If this is the case, then the cable could head lower. Brexit uncertainty is likely to offset the support the pound is receiving from a hawkish Bank of England amid improving UK data and rising inflation. The potentially weaker exchange rate will be a welcome relief for export names in particular. However, if the relentless dollar selling continues then the cable could extend its gains further and this may be an additional factor weighing on the FTSE. In the more near-term outlook, the latest UK wages data on Wednesday and the second estimate for UK GDP a day later on Thursday should cause the pound – and therefore the FTSE – to move sharply.
FTSE lagging behind other indices
The FTSE has been among the weakest of the global indices of late. While US indices managed to bounce back sharply last week, the FTSE’s rebound was nowhere near as eye-catching: a dead-cat bounce, if you like. In fact, unlike its US peers, the UK index has remained below the 200-day average and now testing the first area of trouble around 7300, a level which was previously support and is now activing as a bit of resistance. But if this week’s earnings top expectations then there is a chance that the FTSE will be able to make a more meaningful comeback. Even so, there will be lots of resistance levels on the way up, including at 7435, which was previously support and corresponds with the 50% retracement of the entire recent drop. Slightly above this level, at 7450/5 is where the 200-day average is residing. Meanwhile the first line of support comes in at 7265/70 area, which was previously resistance. The key support below here is at 7100 – this being a longer term pivotal area. Thus, while the FTSE holds above 7100, the longer term outlook remains neutral to slightly bullish, despite the recent weakness.
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