Rebound in yields set to weigh on European open

In what appears to have been a bit of a delayed reaction to Friday’s payrolls report, stock markets slipped back, while the US dollar and yields jumped higher, helped on their way by a strong ISM services report for November.

Friday’s stronger than expected wages numbers have thrown an unexpected curve ball into the markets thinking about the peak inflation narrative, raising the prospect that this month’s 50bps rate rise which is expected next week, could well be followed by similar hikes in the early part of next year.

This uncertainty over the size of future hikes has been amplified by a strong US ISM services report for November which saw a rise to 56.5, while prices paid only slowed to 70, from 70.7, complicating the backdrop of an easing inflation story.

The greenback pulled back from intraday lows in the wake of the higher yields seen yesterday, with the Japanese yen the biggest decliner in a sign that this bout of US dollar weakness may have come to an end. The pound also came under pressure after failing to consolidate a move above the 1.2300 level against the US dollar. On a more positive note BRC retail sales did pick up in November, rising 4.1%, boosted by the change to colder and wetter weather from October, with a pickup in cold weather clothing.

Commodity prices also retreated sharply, with oil prices also sliding back, despite spending most of the day in the black, losing ground to a stronger US dollar and the shifting sands of sentiment over the interest outlook as we investors shift their focus towards the path of interest rates into 2023.  

Gold prices also came under pressure on the back of the rebound seen in US yields, retreating sharply from the $1,800 level, and back below the 200-day SMA.

In contrast to the concerns about US rates, the Reserve Bank of Australia in November unexpectedly hiked rates by a less than expected 25bps, amidst concern about the effects recent rate hikes were having on the Australian economy and ergo the housing market. At the time Governor Philip Lowe said that the RBA wanted to slow the pace in order to better judge the lag effects of previous hikes which could take time to trickle down.

This morning the central bank hiked rates by another 25bps in a move that points to the delicate balancing act some countries are facing in managing inflation lower against the backdrop of higher rates putting pressure on highly leveraged borrowers and elevated house prices. Forward guidance was left unchanged, with the bank warning that rates were still likely to increase in the coming months.

Against that backdrop and weakness in Asia markets, European stocks look set to open marginally lower.  

EUR/USD – Fell short of the 1.0600 area, slipping back a touch but while above the 1.0400 area the bias remains towards the upside. Still above the 200-day SMA but could slip back towards the 1.0340 area.

GBP/USD – Failed to sustain a move above the 1.2300 area, slipping back from 5-month highs at 1.2345. Remains a big obstacle to a move towards 1.2760. We could slip back towards the 1.1985 area on a move below the 200-day SMA.  

EUR/GBP – Continues to find support just above the 200-day SMA and the 0.8540 area. Short squeeze could see a move back to the 0.8675 area. Below 0.8530 targets 0.8480.

USD/JPY – Feels like we may have seen a short-term base after rebounding from below the 200-day SMA at 134.40 with a bullish daily candle. A push back above the 137.50 area could see a return to the 140.00 area.

FTSE100 is expected to open 3 points lower at 7,564.

DAX is expected to open 20 points lower at 14,427.

CAC40 is expected to open 20 points lower at 6,677.