Stocks unaffected by global economic concerns

If you took a glance at the gains stocks are making at present, you would suggest optimism in the global economy must be picking up. On Monday, the S&P 500 recorded a new milestone high (2071.46) while NASDAQ climbed to 4,754.89 and the Dow Jones Industrial Average reached 17817.90. Even the FTSE 100 has risen from the October low of 6.211.64 to trade around 6,729.79, with Nikkei 225 looking set to conclude the month at a level not seen since July 2007. The only problem with the gains that stocks are making right now is that optimism in the global economy is far from picking up. If anything, it is dropping.

The latest Markit Global Business Outlook Survey made headlines on Monday morning when it announced business confidence had slipped to a five-year low in October. The recent gains in the stock markets are being completely encouraged by various central banks easing policy further in the hope of improving their respective economic outlook, which is lifting investor sentiment. However, you just need to take a look at the results of the Markit Global Business Outlook Survey alongside comments late Monday evening from the BoE’s Chief Economist, Andy Haldane, stating that many of the world’s major economies face a prolonged period of slow growth, to realise that the increased sentiment towards stocks are not being felt on the ground.

As mentioned above, the gains in stocks are completely encouraged by the idea that recent monetary easing from the Bank of Japan (BoJ), People’s Bank of China (PBoC) and possibly the European Central Bank (ECB) next week will improve economic fortunes. Even though the PBoC only cut interest rates last Friday, there has already been speculation during the early part of the week regarding further rate cuts to possibly follow in the coming months. When you combine the prospect of further potential rate cuts from China alongside pressure on the ECB to act again next week, it means the stock markets are likely to continue lifting higher in the near term.

In line with expectations, the Eurodollar commenced the week by recovering a proportion of the 160 pip losses suffered after dovish comments from ECB President Mario Draghi on Friday. The pair rose from 1.2362, to conclude trading at 1.2441. Improved IFO data from Germany contributed towards the Eurodollar gains, while Bundesbank President Jens Weidmann’s comments that the ECB could encounter “legal limits” if it introduced QE, prevented investors from pricing in further stimulus from the ECB next week.

As long as investors continue to be prevented from pricing in ECB action, the major downside risk to the Eurodollar today will be the US economic data being released this afternoon. Both the US GDP and Consumer Confidence reading are expected to continue suggesting that the US economic outlook is improving, which would pressure the EURUSD. If the pair moves to the downside, support can be found at 1.2415, 1.2390 and 1.2376.

The Cable also recovered recent losses on Monday, with the pair moving from 1.5627 to conclude trading at 1.57. With investor attraction being limited towards the pair following expectations for a BoE rate rise being delayed, alongside the consensus that next Wednesday’s Autumn Statement may not sit well with investors, no gains beyond 1.57 are expected. If the pair was to progress further, it would require USD profit-taking to inspire risk appetite in the currency markets. Later on Tuesday morning, BoE Governor Mark Carney is expected to speak in London where any reiteration surrounding the UK being set to enter a period of low inflation, as well as the BoE not raising rates anytime soon, will likely lead to the GBPUSD throwing away yesterday’s gains.

Written by Jameel Ahmad, Chief Market Analyst at FXTM.

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