European markets look set to open lower on increased tightening fears

European markets struggled for gains yesterday and succumbed to the downside, with progress capped by a sharp rise in US yields and the US dollar after Minneapolis Fed Chair Neel Kashkari said the Federal Reserve would not be in able to interrupt the interest rate rises if inflation is still rising, even if the fed funds rate is 4.5%.

Kashkari’s comments are key as he has historically tended to lean towards the dovish side on monetary policy, suggesting there is very little appetite so far for the Fed’s tendency to slow the pace of rate hikes .

That stance was echoed by his Cleveland Fed counterpart Loretta Mester, who said she was prepared to vote for another significant rate hike in November because “consumers are holding up pretty well” and rates would need to rise for “it.” is beginning to affect these spending numbers”

US yields have continued to rise on the basis that we could well see 75 basis points in November and another 75 basis points in December, with 10-year and 2-year yields back to where they were last in October 2007 would lie.

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As a result, US markets ended the day significantly lower, with the Nasdaq 100 taking the most hit, although the Russell 2000 also posted big losses, with the latest Beige Book showing that rising mortgage rates and elevated house prices were weakening demand.

Retail spending was weak, reflecting lower discretionary spending. Credit demand also showed signs of slowing amid growing concerns about the outlook.

While the US economy is showing signs of weakening demand, the job market appears to remain resilient, with today’s weekly jobless claims expected to be unchanged at 228k.

We will also hear from 3 other Fed speakers, Federal Reserve Governors Philip Jefferson, Lisa Cook and Michelle Bowman.

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European markets are likely to open lower on softer tone in the US and further weakness in Asia as rising Covid cases in China weigh on risk appetite there and the Hang Seng slips to a 13-year low.

On the data front in Europe we have the latest German PPI figure which will show inflationary pressures in Europe’s largest economy are far from abating.
In August, the PPI rose to a staggering yearly record of 45.8%, and while it will moderate slightly to 44.7% in September, it’s still up 1.3% on a monthly basis, although that’s also less than the same increased by 7.9%.

EUR USD – Still in the broader downtrend with resistance just below the 50-day SMA and trendline resistance from the highs earlier this year. Bias remains for further losses towards 0.9000 while below 1.0000. A break above parity and the 50-day SMA is needed to signal a short squeeze towards 1.0200.

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GBP/USD – Currently struggling to move above the 1.1440 area, just below the 50-day SMA. We need to see a move above the 1.1500 area to stabilize. Provisional support at 1.1150 and last week low in 1.0920 area. A move below 1.0920 opens a return to 1.0800 area.

EUR/GBP – Continues higher up 0f 0.8570 and 100-day SMA after this week’s test. A move through 0.8730 targets 0.8770. A break of this key support level could signal further declines towards 0.8490 and the 200-day SMA.

USD/JPY – Continues to move towards 150.00 level with next resistance at 152.30. Decent support in 147.70 area, 1998 high. Now trading at highest since September 1990.

FTSE100 expected to open 18 points lower at 6,907.

DAX expected to open 68 points lower at 12,673.

CAC40 expected to open 26 points lower at 6,014.

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