Europe set for positive opening as German ZEW set to fall to record low

The new Chancellor has announced measures that would raise a further £32billion, including the scrapping of indefinite income tax cuts, as well as changes to liquor tax, dividend income and IR-35 measurements.

More controversially, he also removed the cap on energy prices from April 2023, although he said the Treasury would carry out a review of measures to make it more targeted thereafter.

While one could argue that yesterday’s measures have stabilized public finances in the short term and brought the UK back into the pack when it comes to the market’s perception of fiscal responsibility, one has to ask how price the economy next year.

Raising the corporate tax rate from 19% to 25% in April next year, it is claimed, is set to bring in another £18billion, but with businesses already squeezed by higher costs and a consumer likely to fall back quite abruptly, this figure seems very doubtful.

It is precisely for this reason that Goldman Sachs has announced that it will cut its forecast for UK GDP growth in 2023, while the UK Chambers of Commerce have called it “a plan for today and nothing for tomorrow”.

It’s not hard to see why businesses are concerned given that at the same time as corporate tax rates rise next year, we could see further sharp increases in energy prices now. that the price cap is gone, but I guess that’s the price to pay for a botched mini-budget plan and current economic orthodoxy.

On the bright side, yesterday’s budget announcements saw yields fall on the gilt curve, meaning interest payments on government debt are now likely to be lower, assuming they continue to fall. , with the yield on British 10-year gilts falling below the US 10. annual return for the first time since the mini-budget.

Further declines in yields are by no means certain given that across the pond, the US Federal Reserve looks set to squeeze the global economy’s throat even tighter with another 150 basis points of hikes. rates by the end of the year.

Lower bond yields yesterday also helped US markets rebound from last week’s declines, with the S&P500 rebounding strongly off 3,500 technical support and the Nasdaq 100 posting its best daily gain since July. Yesterday’s rebound in the US was mainly driven by consumer discretionary, with companies like Netflix and Tesla performing well ahead of the release of the latest earnings numbers later this week, while Amazon and Best Buy also saw a decent day.

In a dim day on the data front, European markets are expected to open higher, with Asian markets also benefiting from a positive session despite China’s decision to delay its third-quarter GDP and sales figures. Retail and Commerce September. Seems like an odd move considering they’re unlikely to be as bad as the Q2 numbers unless the Chinese authorities don’t want them to eclipse the 20th.e National Congress taking place right now.

Bond yields also continued to come under pressure following reports that the Bank of England may delay its quantitative tightening program in light of the recent turmoil in gilt markets.

The only economic report of note today during the European session is the latest German ZEW survey of economic expectations for October, which is expected to fall further, below record lows of December 1992 of -62.2 to a new record high. of -66.6.

EUR/USD – continued to climb towards the highs last week in the 0.9800 area, putting it on track for a move towards the 50-day SMA and trendline resistance from the highs at the start of this week. year. The bias remains for further losses towards 0.9000, all below 1.0000. A break above parity and the 50-day moving average is needed to signal a short compression, towards 1.0200.

GBP/USD – must cross the 50-day moving average and the 1.1500 zone to stabilize. Support came in last week lows in the 1.0920 area. A move below 1.0920 opens a move back towards the 1.0800 area.

EUR/GBP – tested up to the 100-day SMA and trendline support from the August lows at 0.8570, before bouncing back. A break of this key level could well signal further declines towards 0.8490 and the 200-day SMA resistance currently at 0.8720.

USD/JPY – continues to break above the 1998 highs at 147.70, which should now act as support. Now trading at its highest levels since September 1990, we may well see a test of 150.00 in the coming days.

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James R. Rhodes