We saw a positive end to the month for European markets which saw their best gains this year, with the notable exception of the FTSE100 which struggled to keep pace with its peers, due to the underperformance of its big caps of BP, Shell, and AstraZeneca.
US markets finished mixed with the Nasdaq 100 underperforming in the face of a rebound in yields, while the S&P500 posted its strongest month since July last year, and the Dow making a new high for the year.
The US dollar also posted its worst month this year, despite finishing the month on a strong note, as the higher for longer mantra that Fed officials had been so keen to push in the wake of the last meeting, gave way to a series of sharply lower inflation numbers, and fears that disinflation would force central bankers into a U-turn in 2024.
The bigger question now is not whether more rates are coming, but how many rate cuts could we see as we head into 2024, and which central bank will be forced to blink first.
One of yesterday’s biggest decliners was the euro after economic data showed that the French economy unexpectedly contracted in Q3, and headline monthly inflation in France and Italy slipped into deflation in November, while the year-on-year numbers slowed more than expected.
Headline EU CPI inflation also slowed more than expected to 2.4%, and its lowest level since July 2021, and putting it within touching distance of the ECB’s 2% target.
Since August, EU CPI has slowed sharply from 5.3%, and at the current pace of decline could fall below 2% by the start of next year, potentially forcing the ECB to start considering a rate cut, with markets starting to price that very prospect as soon as April.
The manufacturing sector has been in contraction all of this year in both Germany and France, with the last positive all the way back in Q3 of 2022.
Economic activity in Spain and Italy has been slightly better but even here we’ve started to see significant weakness.
Last week’s flash manufacturing numbers saw Germany and France economic activity see divergent fortunes, with Germany edging up from 40.8 to 42.3, while France got worse, slipping back from 42.8 to 42.6. These numbers aren’t expected to change much with today’s final readings.
As for Italy and Spain, October saw a slowdown to 44.9 and 45.1 respectively, in a sign that while manufacturing had been more resilient initially during the summer months, even here we are starting to see the effects that higher rates are having on economic activity, with Spain manufacturing expected to edge higher to 45.5 and Italy to 45.2.
In the UK the picture is slightly better and has picked up every month since the lows in August, with expectations of an improvement to 46.7, from 44.8.
Over the other side of the Atlantic the November ISM manufacturing survey is also expected to improve to 47.8, albeit from a similarly weak position, with prices paid forecast to edge higher to 45.9, and employment to 47.2.
Concerns over weak demand and an economic slowdown has also weighed on oil prices with Brent prices falling for the 2nd month in a row, despite OPEC+ agreeing an additional 1m barrel a day production cut on top of the original Saudi cut announced in April this year.
The announcement of the new agreement was immediately overshadowed by Angola breaking ranks and saying it would continue to pump as before, and seeding doubt as to whether other OPEC members would do the same. Overshadowing the cut, the announcement the US reported record output of its own of 13.2m barrels a day, with the IEA saying it expected to see the oil market return to surplus next year.
EUR/USD – The failure at the 1.1020 area has seen the euro slide back sharply, bringing the lows of this week at 1.0852 into focus. A fall through the 1.0840 area could signal a deeper slide towards 1.0670 and the 200-day SMA.
GBP/USD – The failure at the 1.2720/30 area has prompted a sharp pullback towards the 1.2590 area. A break below 1.2570 signals a deeper pullback towards the 1.2460 area and 200-day SMA.
EUR/GBP – Fell back to the 0.8615/20 area, with a break below the 0.8600 area signalling a steep fall towards 0.8540. Currently have resistance at the 0.8670 area.
USD/JPY – Managed to hold above the 146.65 area and has recovered back through the 148.00 area, which in turn could see a return to the highs of the week at 149.70/80 area. Below 146.60 targets 144.50.
FTSE100 is expected to open 35 points higher at 7,488.
DAX is expected to open 74 points higher at 16,289.
CAC40 is expected to open 30 points higher at 7,340.
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