THEThe past week saw a strong performance from European markets, despite a shaky start, with the FTSE100 closing at a 19-month high and above 7,200 for the first time since February 2020.
Despite all the negativity surrounding port disruptions, supply chain delays, labor shortages and skyrocketing energy prices, investors are reaping the benefits of earnings reports, which are outpacing in set expectations.
While there are understandable concerns about the effect that soaring energy prices will have on consumers’ disposable income, it seems be more and more convinced that with the amount of excess savings still unspent, there is a bit of a buffer in case we get an element of demand destruction in the coming weeks. The big question is, how big is this tampon and how can consumers afford the higher prices?
US markets also ended the week strong, with the Dow Jones posting its best week since June and less than 1% off its record, the S & P500 and Nasdaq also ending the week strong.
Asian markets got off to a shaky start, with most of the attention focused on China’s disappointing third-quarter GDP this morning, as well as retail sales and industrial production data for September.
At the start of this year, the Chinese economy was generally expected to experience annual GDP growth of around 6%, a figure at the time considered somewhat pessimistic.
It turns out that now looks a bit too bullish, given the sharp slowdown we saw in Q3 numbers this morning.
In the first quarter, the Chinese economy grew by 0.4% and 18.3% on an annual basis. On an annual basis this slowed sharply in the second quarter to 7.9%, although over the quarter we saw a slight improvement to 1.3%. The latest figures this morning saw the Chinese economy come to a near halt on a quarterly basis, rising 0.2%, below expectations of 0.4%.
It’s not hard to see why this morning’s third quarter GDP disappointed the various port disruptions seen throughout the quarter due to covid restrictions, supply chain issues, as well as soaring prices. costs of electricity and forced shutdowns of the Chinese economy. The performance of the economy has not been helped by the various crackdowns by the Chinese authorities on various parts of the economy, as well as the problems around Evergrande and the real estate sector.
Recent slowdowns in recent PMI figures have shown a marked slowdown in economic activity and import demand has also slowed. Today’s 0.2% economic expansion also translated into a lower 4.9% year-on-year number, which currently puts it below the 6% target mandated by the Chinese government.
The various plant closures in September, due to rising energy costs, also weighed on industrial production in September, standing at 3.1%, well below expectations, although sales to the retail, which slowed sharply in August to 2.5%, expected better at 4.4%.
The pound had a strong week last week, hitting its highest level against the euro since February 2020, and a 5-year high against the Japanese yen, as rising gilt yields increase its appeal, against the low and negative returns. Bets that the Bank of England may well seek to respond to mounting inflationary pressures before the end of the year saw the market start to integrate a number of rate hikes before the end of 2022.
Despite fears that the Bank of England may be on the verge of making a policy error, Governor Andrew Bailey has done nothing to soften the prospect that the central bank may well have to act before the end of this year, when he said if inflation expectations started to become more entrenched, the MPC would act. Although he insisted that he still believed the current increase in energy prices was transient, he said it could last longer than initially expected.
EUR / USD – the rebound of the support at 1.1520 lost steam in the 1.1625 area last week. We have resistance to October highs at 1.1640 / 50. A break above that targets resistance at 1.1760. Below 1.1520 targets the 1.1450 area.
GBP / USD – had a solid week pushing above the 1.3750 zone on Friday. This puts us on track for a move towards 1.3900, but first we need to break above trendline resistance from June highs at 1.3820. Support now sits at 1.3670.
EUR / GBP – fell back to the 0.8420 area last week, potentially opening new weakness towards 0.8280 and 2020 lows. We now have resistance at the 0.8470 level, as well as the 0 area , 8520.
USD / JPY – found support at 113.20 last week and has now broken through 114.00 which puts us on track for a move to the 2018 highs at 114.75 the next target. We could drop back down to the 112.40 level, on a break below 113.00.