Markets, Eurozone PMIs, Oil, Gold
It’s shaping up to be a relatively peaceful end to what has been an otherwise action-packed week, with steady gains in Europe getting us off to a decent start.
European markets were relatively flat at the open but a batch of encouraging PMI numbers from the euro area has given stocks a bit of a lift. The euro is also edging higher on the back of the numbers, looking to build on the gains of the last couple of days and continue the march towards 1.14 against the dollar, where it could face stiff resistance. This has of course been aided by some Fed-driven weakness in the greenback, which will appease Trump, for now.
The PMI releases go against what had become quite a worrying trend and may spur some optimism that things are on the up. Of course, Germany’s manufacturing sector remains deep in contraction and the global economic outlook isn’t great so perhaps it’s still a little early for optimism. Still, it’s good news and good data at a time when it’s very much needed and may enable us to see the week out on a high.
The focus now switches to North America on the data front, with US manufacturing and services PMIs due, as well as Canadian retail sales. The trend again has not been too favorable in the US so perhaps a similar result will give us cause for optimism that doesn’t just come from central banks cutting rates.
If this week has shown anything, it’s that we’re once again very reliant on central banks for returns. US stocks are back at record highs and we very much have central banks to thank for that. The markets had already been on a decent run from various comments in recent weeks but Draghi put the icing to the cake on Tuesday and Powell added the sprinkles on Wednesday.
Rising tensions in middle east a cause for concern
Oil prices are steady again on Friday, following another spike on Thursday which accompanied a broader rally in the stock market. Rising tensions in the middle east after Iran shot down a US drone over the Strait of Hormuz will likely have also contributed to the large gains, given that a fifth of all oil production passes through there on a daily basis. Still though, the gains we’re seeing seem modest give the scale of the escalation we’ve seen in recent weeks. Clearly the global growth story is a much bigger worry for oil traders right now.
That said, it could provide some near-term upside, with the recent rally taking WTI through the previous June peak and spurring it on. The next test could come around $59, having already stalled a little around $58. For this bullish run to continue though, I think we’ll need to either see an agreement between Trump and Xi next week that avoids new tariffs and increases the prospect of a deal soon, or a significant escalation between the US and Iran.
Gold marching on
Gold has been reinvigorated by recent events, with dollar weakness being a particularly strong catalyst for the yellow metal as it soared through $1,350 and wasted no time in marching through $1,400 to hit near-six year highs. With central banks becoming increasingly accommodative and geopolitical risks now rising, it’s no reason people have become so bullish on oil.
The question now is how far it will go and whether the recent aggressive spike is justified. We’ve already seen a small correction overnight which has left us below $1,400 but we don’t seem to be lacking much momentum at this stage. Perhaps the rally still has some legs yet. We have to go a long way back to find prior levels that the yellow metal struggled at but $1,430 looks to have presented a challenge on numerous occasions so may be one to watch, as did $1,450 and $1,480 above that.
