European equity markets are expected to open a little softer on Tuesday, with traders continuing to eye moves in oil, the pound and the yen, as well as the latest economic sentiment surveys from the eurozone and Germany.
The pound appeared to find some stability on Monday following the flash crash on Friday and yet it continues to drift lower. Once again, this morning it’s down by close to half a percent and approaching 1.23 against the dollar. While we may see it find support soon, there appears to be little faith in sterling right now due to the huge uncertainties around Brexit and therefore further turbulence likely lies ahead for the pound.
The only currency not capitalising on the depreciating pound is the yen, which is coming under some welcome pressure itself. Haruhiko Kuroda’s admittance on Monday that hitting the 2% inflation target will likely now have to wait until 2018 gave the yen the dovish kick it needed and that the central bank, through policy action, has struggled to give it.
With the markets now coming around to the idea of a Fed rate hike in December, the Bank of Japan may have to work less hard in the coming months to talk down its currency against the greenback.
Fed policy maker – and FOMC voting member next year – Charles Evans claimed overnight that he would be fine with the central bank raising interest rates in December but would prefer to see inflation rise closer to the 2% target before deciding. Neel Kashkari – also an FOMC voter next year – recently appeared to share Evans’ views on this and we’ll find out if this remains the case when he speaks later on today.
Oil is currently trading a little lower today, but is likely to remain volatile throughout the session. Comments from Vladimir Putin on Monday sparked some life into oil once again as he talked up the chances of a coordinated production freeze between Russia and OPEC, something the market needs if gains are going to be sustained. I’m sure we’ll continue to hear more on this in the coming weeks ahead of the OPEC meeting next month which should ensure oil remains quite volatile.
The only notable data release today will be the ZEW economic sentiment surveys from Germany and the eurozone, both of which are expected to marginally improve again but remain below pre-Brexit levels. While the hard data currently suggests the Brexit impact has been muted, confidence clearly remains fragile and expectations are that it’s a matter of when the numbers turn bad rather than if.