Fiscal cliff optimism to buoy stocks, ahead of UK CPI.
By Michael Hewson (Senior Market Analyst at CMC Markets UK)
The on-off optimism with respect to the fiscal cliff talks that has dominated sentiment over the past few weeks continues to drive sentiment in US markets after yesterday?s move higher saw stocks resume the uptrend in stocks that has been in place since November 16th and as such help Europe?s markets open higher this morning.
Yesterday?s gains were once again driven by growing optimism that ultimately Republicans and Democrats will step back from the brink and agree something by the end of this week to avert the fiscal cliff.
It would appear that John Boehner?s weekend retreat on tax rises, a significant move, has offered a glimmer of hope that there could well be further wriggle room in the coming days, but progress between the parties remains glacial despite the fact that any agreement needs to wrapped up this week and then ratified by both houses of government to make it on to the statute books by January 1st.
In the UK the latest inflation numbers for November are expected to show a slight annualised decline from 2.7% in October to 2.6%.
On a month on month basis, expectations are for a monthly rise of 0.2%, however given that November saw significant, above inflation energy price rises of around 9% on average from various energy companies, there is a concern that the number could go the other way, and move higher again, especially if price falls in other areas don?t fully compensate.
Retail prices for November are expected to remain unchanged at 3.2%, equating to a month on month rise of 0.2%.
As such Mervyn King will have to once again write his customary letter to the Chancellor explaining why the bank has missed its inflation target, though I would imagine he?s already had it pre-printed to save time, having had to use it so often over the last three years.
The only silver lining is that producer prices do appear to be under control somewhat mitigating the upward pressure on prices at the factory level.
In Europe last week saw Spanish house prices show an increase on the rate of decline of 15.2% year on year, and Bank of Spain data to be released today is likely to show that as a result of this the amount of non-performing loans is also likely to have increased from the ?182bn number from last month.
Spain will also be looking to sell 3 and 6 month T-bills today, while in Italy the Italian senate will begin sitting to start the discussion on the 2013 budget plan.
EURUSD ? yesterday?s consolidation near to and beyond its May highs appears to be building up a flag continuation pattern which if it breaks higher could well see a sharp move towards 1.3250 initially, suggesting further gains towards 1.3490 and the 200 week MA. 1.3170 also happens to be 38.2% retracement of the 1.4940/1.2045 down move.
To undermine this scenario we need to see a move back below 1.3020 to retarget the key support at the 1.2880/90 level which is the 50% retracement of the up move from 1.2660 to last week?s high at 1.3125.
A move below the 1.2880 level opens up a move back towards the trend line support from the 1.2050 low, which now sits at 1.2825, and the 200 day MA at 1.2790.
GBPUSD ? having pushed through 1.6180 the cable is getting closer to the November highs at 1.6310 which in turn could well see a move back towards the 1.6500 level.
Trend line support from the 1.5830 lows now comes in at 1.6080, while the key support remains at 1.5980. Only a break through here targets major trend line support at 1.5885 from the 1.5270 lows, the 200 day MA at 1.5880 as well as 1.5660.
EURGBP ? the November highs at 0.8165 continue to cap further advances; however the lack of pull back suggests a move to the 0.8300 level could be in the works. The 0.8080 level needs to hold for this move to unfold otherwise we?re probably heading back towards 0.8030 and trend line support from the July lows at 0.7755 which remains the key level for the uptrend to continue.
USDJPY ? a new high of 84.40 for the year but we?ve slipped back somewhat, but remain above last week?s close at 83.55. Further yen weakness remains likely towards the 2011 highs at 85.55 but we need to stay above the break out level at 82.80 for this to unfold.
If we do drop below this then there remains solid support at 81.70. If we break below 81.60 then the potential is there for a move towards 80.50, and even 79.90
Equity market calls
FTSE100 is expected to open 17 points higher at 5,927
DAX is expected to open 20 points higher at 7,625
CAC40 is expected to open 16 points higher at 3,654