Sterling and Euro rally on May Day Holiday – but for how long?
Core European markets are closed for the May Day public holiday but the UK’s FTSE100 is pouring on some modest gains, while GBP shot up to levels we haven’t seen since mid February while gilts declined. UK PMI manufacturing data came in better than expected, at 49.8 from 49 expected, edging close to the 50 level. Above 50 will put the sector back in expansion zone. Volumes are depressed though as most of Europe is closed but the tone is upbeat on the whole with US stock futures in the black too. Traders are now waiting on the US ADP report, ISM manufacturing and Facebook numbers – all of which have the potential to shake up today’s price action.
The FOMC policy meeting is due after the London market finish but no change is expected. The big question on the markets’ mind is the fate of QE which we should get some insight into in the coming weeks from various Fed members making speeches and of course the Fed meeting minutes from this FOMC meeting. If indeed we see further deterioration in US data, with the ISM manufacturing index sliding and ADP data showing slippage in the labour market, traders will expect the Fed to keep the doors wide open for QE for the remainder of the year. Staying on central banks, expectations for an ECB rate cut tomorrow continue to run high and if the ECB fail to cut, we could see a pretty aggressive move to the downside. But, a cut should see equities react positively with key indices like the DAX to push above the 8000 level and near the 6500 for the FTSE100.
That said, a rate cut is baked in the price, widely expected by the market so moves to the upside will be limited in the near term. The EUR/USD to trade on topside of its range up to 1.32 but will not be able to break above. The market will view the cut as the least the ECB can do to ease conditions in the money market and have the flexibility on rates following this week’s inflation figures. Italy now out of political paralysis should assist the upward move in markets and European earnings have been respectable on the whole so far with no real nasty surprises so I expect the bullish tone to remain after a rate-cut. On the flip side, the ECB will still need to offer the market guidance and reassurance on Slovenia as the crisis appears to be spreading to that country and also hint at further rate-cuts in the months ahead if needed. So a rate-cut would offer short respite for markets before the focus shifts to unresolved drama in the periphery and markets really need reassurance by the ECB for the bullish tone to prevail in the mid-term.
This article was written by ETX Capital’s financial spread betting team.