European stocks set for lower open as RBA raises rates again

European markets got off to a negative start to the week as the effects of the Friday US employment report rebound were tempered by a disappointing ISM services report which painted a contrastingly different picture of the US economy.

The weekend Saudi Arabia oil production cut, which ordinarily should have prompted a sharp upwards move in oil prices initially saw prices move to one-month highs, however most of the gains quickly disappeared on concerns over the demand outlook.

US markets initially got off to a reasonably positive start but the disappointment over the May ISM services report tempered gains, as well as prompting a sharp reversal in yields which had been higher in the lead-up to yesterday’s 3pm data drop.

The weak nature of the ISM services report was in sharp contrast to other service sector numbers, raising more questions, than answers about the strength of the US economy, ahead of next week’s Fed meeting.

While the S&P500 managed to put in a fresh 9-month high the index finished the session slightly lower, as did the Nasdaq 100 after Apple shares which had initially posted a new record high, rolled out into the close after the first day of the WWDC got underway.

The unveiling of the new Vision Pro Headset was the centrepiece of a host of product and software upgrades. The Vision Pro will allow users to view content in virtual and mixed reality, with Disney+ signing a deal with Apple to stream its content by way of the headset, with a total price tag of $3,499. The headset looks a little like a pair of ski goggles or scuba mask, with initial impressions seeing the shares rollover into the close to finish lower.

With US central bank officials now muzzled until after next week’s rate decision markets now must reassess whether we do see a pause next week, or whether we see another 25bps hike. The odds still favour a pause even more so after yesterday’s ISM report, however we still have next week’s CPI numbers to contend with. 

Earlier today we saw the RBA kick off an important two weeks for central bank rate decisions by raising rates by 25bps taking the headline rate to 4.10%. Today’s decision could have gone either way, but in the past few weeks there has been a sea change in Australia when it comes to how the RBA is viewed as well as its competence.

Last month the RBA surprised the markets by unexpectedly hiking the cash rate by 25bps to 3.85%. Only days before that decision the RBA had been heavily criticised for being too slow in spotting the inflation surge seen at the end of 2021, and through 2022.

This criticism appears to have stung, and now the hawkish turn we’re currently raises the prospect the central bank could possibly overcompensate in the opposite direction. This runs the risk of them tightening too hard and unsettling the housing market. That said the headline rate in Australia remains well below its immediate peer the RBNZ where it sits at 5.5%, so the RBA still has plenty of room to catch up.

Today’s European market session is set to see EU retail sales for April which are predicted to see a modest improvement of 0.2% after the sharp -1.2% decline in March.

Before that we have German factory orders for April, with the hope that after an awful March number of -10.7% and an economy in recession that Q2 will get off to a positive start with a gain of 2.8%.

EUR/USD –The failure at the 1.0780 area last week has seen the euro slip back, still within a tight range, with support back at the recent lows at 1.0635. We need to see a break of this range with broader resistance at the 1.0820/30 level.

GBP/USD – After slipping back the 1.2540 area last week we remain in a broader uptrend with support at the 1.2300 area and trend line resistance from the 2021 highs at 1.2630. This, along with the May highs at 1.2680 is a key barrier for a move towards the 1.3000 area. 

EUR/GBP – Found support at the 0.8560 level last week, just above the December 2022 lows at 0.8558. Is currently squeezing higher with the next resistance now at the 0.8660 area. We also have major resistance at the 0.8720 area.

USD/JPY – Rebounded back towards last week’s highs at the 140.95 area, falling short and slipping back below the 140.00 area. Is the US dollar trying to carve out a top? We have support at the 138.40 area which if broken could see a move back to the 137.00 area. 

FTSE100 is expected to open unchanged at 7,600.

DAX is expected to open unchanged at 15,964.

CAC40 is expected to open unchanged at 7,201.