The Chinese officials announced a 50% cut in car purchase tax, which fueled a rally in European stocks on Monday. Auto stocks lead the gains with Volkswagen jumped by over 5%. Bank shares also feel strong due to solid earnings. Investors shrugged off the news from Germany, where after the local vote over the weekend, there are reports that Merkel will not stand for re-election as CDU party chair in December. Further on, this factor could add to the political uncertainty in the region, while the issue with Italy’s budget remains unresolved. As such, Italy’s FTSE MIB gains 2.42 per cent to 19,136, Britain’s FTSE 100 adds 2.00 per cent to 7,078, France’s CAC 40 rises by 1.15 per cent to 5,024, while German DAX 30 gains 2.00 per cent to 11,425. US stock index futures point to a sharply higher open as the general risk sentiment has improved.
The US data on personal income and spending came in decent. Personal income increased by 0.2% vs. 0.4% expected, while the prior result was revised from 0.3% to 0.4%. Personal spending rose by 0.3%, in line with expectations. The core PCE was +0.2% m/m vs. +0.1% expected, which is the key indicator that cements December rate hike expectations. The dollar rose after the report as the general inflation picture turned out rather bullish and supportive of further gradual tightening by the Fed.
As such, EURUSD turned negative on the day after some attempts to break above the 1.14 handle earlier in the day. The euro still looks unstable and vulnerable against the backdrop of budget woes in Italy, the increasing pressure on Merkel and the sluggish investor optimism in general as risk-off sentiment may reemerge at any moment. S&P’s decision to maintain Italy’s credit rating was cheered by the local bond market, but the relief was only marginal as the outlook was revised to “negative”. Traders will follow further developments in Germany and Italy down the road, while the key event of this week is the US NFP report due on Friday. Strong lobs and wages data could fuel dollar demand and send the euro to fresh 2018 lows below 1.13. In the short term, the pair needs to get back above 1.14 to avoid a more aggressive selling pressure.
USDJPY turned higher on Monday as the yen safe-haven demand has ebbed on the back of better risk sentiment in Europe. The pair got back above the 112.00 barrier but faced resistance marginally below the 112.50 region. Despite the current recovery, fuelled in part by strong US data, the downside risks remain as the sentiment in the global financial markets could change quickly because the volatility stays elevated amid the persistent global risks. In the short term however the greenback could retain the bullish tone but the price will hardly be able to regain the 113.00 mark any time soon as traders remain cautious.
Brent crude is back under the selling pressure after another failed attempt to challenge the $78 level. Traders digest the Baker Hughes report that showed the number of oil rigs in the US continued to expand and reached fresh March 2015 highs last week. It supposes increase in crude oil production down the road which coupled with concerns over the OPEC production rise will likely cap the bullish attempts in the days ahead, while the Iranian sanctions are priced in already. Technically, Brent needs to stay above the $75 figure to avoid a more intense downside pressure which prevails as long as the price remains below $78.
Gold price started in the red after four weeks of gains, though the bearish risks look limited at the moment as the risk sentiment could worsen once again. The key risk for the bullion comes from stronger dollar as the currency gains support from solid US data and rising December rate hike expectations. As such, the price will hardly challenge the $1250 region in the days ahead, but the probability of a break below $1215 is also low at the moment.
Nathan Lambert, Head of Global FX Analytical Department