Wall Street Rebounds, but European Morale Stays Subdued

The US dollar continued to gain yesterday, perhaps due to increasing expectations over a quicker removal of monetary policy stimulus by the Fed, but equities rebounded, suggesting that stock investors may have already digested the idea of higher rates. In Europe thought, the picture was different, with appetite staying soft due to the new COVID-related restrictions around the continent. Today, we will get to hear from ECB President Lagarde and BoE Governor Bailey, remarks of whom could shape market expectations around the future policy path of their Banks.

Most European Indices Continued to Slide, Wall Street Trades in the Green

The US dollar continued to drift north against most of the other major currencies on Wednesday and during the Asian session Thursday. It underperformed only versus CAD, while it was found virtually unchanged against CHF. The greenback gained the most versus NZD and JPY.

The strengthening of the greenback and the safe-haven franc, combined with the weakening of the risk-linked Kiwi, suggests that financial markets may have traded in a risk-off fashion once again. However, the strengthening of the Loonie and the weakening of the yen point otherwise. Therefore, in order to get a clearer picture with regards to the overall investor morale, we prefer to turn our gaze to the equity world. There, most of the major EU indices under our radar were lower or unchanged. The only gainer was Italy’s FTSE MIB, due to Telecom Italia taking another shot in the arm, surging 15.6%, following reports that KKR is considering boosting its offer for the company. Later in the day, sentiment improved in Wall Street, with the S&P 500 and Nasdaq trading in positive waters and Dow Jones staying near its opening levels. Today in Asia, the picture was more mixed.

Yesterday, we said that we expect the US indices to rebound and trade higher soon, despite increasing expectations over a quicker removal of monetary stimulus by the Fed. In our view, most investors have already digested that idea, convinced by recent comments from several Fed policymakers, as well as by the reappointment of Jerome Powell as the Fed Chief. This is also evident by the fact that the S&P 500, and especially Nasdaq, gained, despite the minutes of the latest FOMC meeting revealing that officials have been considering a faster tapering pace and sooner rate hikes since then. Thus, we stick to our guns that the US dollar may stay strong, at a time when investors are willing to buy stocks, conditional upon economic data confirming the resilience of the US economy.

Now in Europe, the picture is not so bright. We believe that equites here may stay under pressure for a while more, and this may be due to increasing COVID cases and the imposition of fresh restrictive measures. As we noted yesterday, although the flash PMIs for November surprised to the upside, suggesting that the Euro-area economy has not been affected by the latest supply shortages as many may have believed, the new pandemic-related measures keep concerns over the future performance of the economy elevated. Even the German Ifo survey said that business morale deteriorated for the fifth straight month in November, highlighting investors anxiety even before the imposition of new restrictions.

What’s more, expectations over a sooner rate increase and a faster rate path by the Fed, raised speculation that the ECB may also raise rates sooner, with participants fully pricing in such a move next year. However, with the risk of further economic slowdown in Eurozone, we don’t believe that ECB officials will dare to think of something like that. Today, we will get to hear from President Lagarde, and we expect her to reiterate the view that raising interest rates now to rein in inflation could choke off the Eurozone’s recovery. We expect the minutes from the latest ECB meeting, due out an hour ahead of Lagarde’s speech, to deliver the same message. This is likely to keep the euro pressured, especially against the US dollar, as well as against the pound.

GBP-traders have raised bets that the BoE could hit the hike button next month after Governor Andrew Bailey said that they are still on a path towards raising interest rates, and after the latest CPIs accelerated by more than expected. Governor Bailey will speak today as well, and another round of hawkish remarks could encourage some more pound buying.

Euro Stoxx 50 — Technical Outlook

The Euro Stoxx 50 cash index traded lower yesterday but hit support at 4240 and later in the day, it rebounded. Overall the index has been in a sliding mode since November 18th, when it hit resistance at 4415, while the next day, it fell below the upside support line drawn from the low of October 6th. With that in mind, we will consider the short-term outlook to be negative.

We believe that, even if the latest rebound continues for a while more, the bears may take charge again from near the 4310 zone and push the action back down for another test near yesterday’s low of 4240. A break of that barrier will confirm a forthcoming lower low and may extend the fall towards the low of October 29th, at 4185.

In order to abandon the bearish case, we would like to see the recovery extending above the high of November 23rd, at 4327. This may not be a signal of that the prior uptrend is back in force, but it may result in some short-term advances. First, we could see investors targeting the high of November 22nd, at 4372, the break of which could extend the advance towards the high of November 18th, at around 4415.

EUR/GBP — Technical Outlook

EUR/GBP has been trading in a sideways manner since November 17th, between the 0.8380 and 0.8430 barriers. However, bearing in mind the fundamentals, as well as that the prevailing longer-term path has been to the downside, we would see more chances for the rate to exit the range to the downside rather than to the upside.

A clear dip below 0.8380 would confirm a forthcoming lower low and may see scope for declines towards the low of February 25th, 2020, at around 0.8335. IF that level is not able stop the fall, then we could experience extensions towards the 0.8294 zone, which prevented the rate from falling lower back on December 12th and 13th, 2019, as well as between February 13th and 18th, 2020.

On the upside, we would like to see a break above the upper bound of the aforementioned range, before we start examining whether the bulls have gained the upper hand. This could result in advances towards the inside swing low of November 15th, at 0.8462, the break of which could target the high of that day at 0.8483.

As for the Rest of Today’s Events

Besides the ECB minutes and the speeches from ECB President Lagarde and BoE Governor Bailey, we will also get to hear from ECB’s Elderson and Schnabel, as well as by BoE MPC member Haskel. Otherwise, the calendar is very light, with Wall Street set to stay closed in celebration of the Thanksgiving Day.

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