Europe set for a mixed open as debt ceiling deal hopes shift towards next week

The modest declines of the early part of this week accelerated yesterday, with sharp falls in European markets across the board, as sentiment continued to deteriorate. Investors appear to be wrestling with twin concerns, the resilience of the China recovery story, and the continuing impasse between US policymakers over the debt ceiling which is translating into worries over an accidental default.

We saw heavy falls in the DAX, FTSE100 and CAC 40 posting their biggest one-day losses since March, with the FTSE100 falling below its April low, and to its lowest levels in 6 weeks.

US markets also finished lower for the second day in a row, with the S&P500 dropping to a one week low, while the Nasdaq 100 also finished lower, however losses here much more contained, ahead of last night’s Q1 numbers from Nvidia.

These were much better than expected as Q1 revenues came in at $7.2bn, while we saw a big upgrade to Q2 revenue guidance of $11bn, which could translate into a decent uplift when US markets open later today.

Last night’s Fed minutes showed there was a divergence of opinion in terms of support for further rate hikes amongst FOMC members, although there was broader unanimity for the idea that rates were unlikely to fall soon.

There was also broad agreement that inflation remained “substantially elevated”.

The Fed’s forecasts kept intact the predictions for a mild recession starting later this year, while the core inflation forecast was revised slightly higher.

The bigger question, however, is whether these minutes are an accurate reflection of how they feel now, given the strength of recent data. The raising of the debt ceiling is always likely to be a key consideration but given recent commentary from some Fed policymakers there is a cohort who are leaning towards a June hike already. This view is likely to be dependent on next week’s payrolls numbers, as well as the next CPI numbers which are released before the next Fed meeting.

For the here and now markets are working on the premise that another hike is possible and that rates are unlikely to come down quickly, with the US dollar firmer and yields higher.

As for the debt ceiling, yesterday’s market weakness is surely the first sign of some market jitters that US politicians may push the brinkmanship too far. Yesterday US Treasury Secretary Janet Yellen reiterated her view that 1st June was her main deadline, however she did acknowledge there was some wriggle room on this.

This seems eminently sensible given that time is running out to get any legislation through before the 1st of June deadline date.

As we look towards today’s European open, we can expect to see a mixed open after Asia markets also came under pressure, as the prospects of a deal before the weekend receded.

Today’s focus on the data front returns to weekly jobless claims and the latest numbers on US Q1 GDP.

The first iteration of US Q1 GDP was disappointing with the economy growing by 1.1%, slowing by more than expected, largely due to a bigger than expected scaling down in inventories.

On the plus side personal consumption rebounded strongly from 1% in Q4, to 3.7%, as US consumers went out on a New Year splurge.

Slightly more concerning was rise in core PCE over the quarter, from 4.4% in Q4 to 4.9%.

We’re not expecting to see much of a change in today’s revisions, with most of the attention likely to be on the core PCE number for evidence of any downward revisions, as more data gets added to the wider numbers.

Weekly jobless claims are set to come in unchanged at 242k.   

EUR/USD – Has so far managed to hold above 1.0750, with rallies so far confined to 1.0800. We need to see a move back above 1.0840 to stabilise. A break below 1.0750 argues for further weakness towards 1.0610, with initial support at 1.0710.

GBP/USD – Continues to slip lower with a break below 1.2350 arguing for a move towards the 1.2270 area. Below 1.2360 opens the potential for a move back towards 1.2270. 

EUR/GBP – The 0.8650 level managed to hold and now looks set for a retest of the 0.8740 area, where we have resistance. A move below 0.8650 could see a move towards 0.8620.

USD/JPY – Closing in on the next target at 139.60 which is a 50% retracement of the down move from the recent highs at 151.95 and lows at 127.20. Support remains back at the 137.00 area and 200-day SMA.

FTSE100 is expected to open 3 points lower at 7,624.

DAX is expected to open unchanged at 15,842.

CAC40 is expected to open 5 points higher at 7,258.