Consumer price inflation (CPI) in Europe dropped during the month of April, as the latest release showed that prices rose 2.6 percent on a yearly basis.  This is a slight drop from the 2.7 percent rise that was seen in March but the number was slightly higher than the 2.5 percent forecast that was generated by most market analysts.

The President of the European Central Bank (ECB) released comments outlining the official inflation outlook at the end of last week and he used the term “broadly balanced” to describe the factors that could potentially threaten price stability in the region.  Essentially what this suggests is that the ECB is content with current interest rate levels, at least for the time being.  Energy prices have dropped in the last few weeks, and this is supportive of the ECB’s current stance as global demand forecasts continue to moderate.

Interest rates in Europe are currently seen at 1 percent and at the moment markets are expecting no change in policy at the central bank’s next policy meeting on May 3^rd.  There has been very little evidence of concern within the central bank relative to inflation as voting members are clearly more focused on developments in Spain and other countries affected by the region’s sovereign debt crisis.  ECB inflation forecasts are seen at 1.6 percent for the remainder of 2013, which is below the historical target rate of 2 percent.

Oil prices are a major factor in whether or not these forecasts will be accurate and the commodity has dropped 1.8 percent since the beginning of February.  Drops like this leave consumers with higher levels of disposable income, and if this trend continues expect the difference to filter into other sections of the economy and potentially improve corporate earnings during the next reporting period.

Looking ahead, the next major macro release out of Europe will come with the unemployment survey, which will be released on May 2^nd, and is expected to come in at a slight increase of 10.9 percent for the month of March (from 10.8 percent previously).  Part of the logic for the negative forecasts is coming from the declines in consumer sentiment that were reported last week, and this suggests that Euro area businesses will be less likely to make new hires as news headlines continue to focus on negative aspects of the regional economy.  Given the latest rally in the Euro, a negative employment report is likely to present some high risk to reward shorting opportunities.

Technical Analysis:

The EUR/USD has seen an impressive rally in the last few weeks, but when we pull out to the daily charts we can see that the pair is coming into some significant resistance levels that are likely to contain prices this week.  Weekly down trend line resistance coincides nicely with the 100 day EMA and the RSI is approaching overbought territory.  As such, long term shorts can be taken in this area, targeting a drop back to at least 1.30.

The DAX is continuing to press higher, breaking short term resistance levels and the next upside target is now seen at the confluence of resistance at 6930.  This area shows the daily down trend line as well as the 61.8% Fibonacci retracement of the drop from 7210.  Wait for a rise here before entering into new short positions.

Equity markets in Asia are lower on the day breaking two consecutive days of gains as the main circulating news story is the credit downgrade in Spain which is garnering more of the market’s focus than the improved earnings from Samsung and the latest decision from the Bank of Japan (BoJ) to inject monetary stimulus (additional purchases of government assets).  Given these factors, we can see that market attention is still firmly centered on Europe and traders are willing to ignore or at least minimize positive stories seen in other areas.

Part of the reason for this can be seen in companies like Nippon Sheet Glass Company, which makes 39 percent of its sales to European customers.  The company’s stock was lower by almost 2 percent during the Tokyo session.  Nintendo was also lower by 6.1 percent after the Wii console maker revised lower its profit forecasts and Mitsubishi Financial (the biggest commercial lender in Japan) dropped by 0.3 percent, reversing gains previously inspired by the BoJ policy announcement.  The big gainer on the day was Samsung Electronics, which 2.8 percent on its strong earnings release.

Going forward, market volatility will be determined by the degree to which weaker macro economic data will be seen affecting global earnings in corporates.  Rallies in equity markets have been strong so far this year so there continues to be a downside risks as recent data releases remain questionable.  The MSCI Asia Pacific Index is lower by 0.2 percent to trade just above 124 as three stocks within the index were higher for every two stocks that declined during the session.  Early in the session, the Index was actually seeing gains of roughly 0.5 percent (after the BoJ statement) but traders pared back long positions into the close, creating a down trading day.

Specifically, the BoJ announcement showed that policy makers are looking to increase the asset purchase fund in Japan to 40 trillion JPY, which is an increase of 10 trillion JPY from the previous meeting.  The central bank’s main goals are to stimulate economic growth and keep the JPY from gaining additional strength, as this currency appreciation is seen weighing on the country’s main export companies.  The total impact on the Nikkei 225 was limited, as declines of 0.6 percent were seen on the day (after seeing gains of 1.4 percent earlier in the session).  Japanese industrial production figures were also released, coming in weaker and giving many analysts evidence to make the argument the current BoJ policy programs are insufficient for restarting the nation’s troubled economy.

Technical Analysis:

The EUR/JPY is failing just ahead of some critical resistance levels, as the 61.8% retracement of the latest decline aligns with historical resistance and the 100 week EMA.  Bias remains firmly to the downside as long as this area remains intact, with prices focused on a test of the support seen at 97.50.

The Nikkei 225 is trading with a downside bias but prices continue to be caught in a short term range with support defined by the 9420 level (also the 100 day EMA) while resistance is seen at 9705.  Long term momentum is downward, which suggests the direction of the break we will see but a break of resistance would also be encouraging in the short term.

The Reserve Bank of New Zealand (RBNZ) conducted its monetary policy meeting overnight and left its base rates steady at 2.5 percent but the accompanying statement did surprise markets to some extent, in that the central bank showed a more upbeat opinion for the national economy and opened the door for a rate increase in the first half of this year.  The only suggestion in the statement that this might not be the case related to the strength of the New Zealand Dollar, which continues to be an area of concern for the central bank as it weighs on export companies.

Given that the central bank sees risk in both directions (heightened inflation vs. excessive currency strength) the New Zealand Dollar could be one of the more interesting trades in the coming months as trends like likely shift as scheduled macro data is released.  The potential increases in relatively predictable volatility should be viewed as an opportunity by traders and this should receive continued attention going forward.  Initial market reaction to the central bank statement was bullish, despite the concern expressed over currency strength but prices are nearing historical highs and downside risk outweighs upside potential.

The other main story was seen with the latest FOMC monetary policy statement which was accompanied by revisions to both GDP and inflation projections (which were both seen higher for the remainder of the year).  In addition to this, some of the voting members altered their views on the pace of policy adjustment, suggesting that changes will likely need to be made before the previously set 2014 deadline.  Looking ahead, market activity in the US will be dictated by the Non Farm Payrolls figures to be released next week as well as the FOMC minutes, which will be made public on June 20^th.

In the UK, the main story of the week has been the negative GDP figures, marking the first double dip recession since the 1970s.  Markets were anticipating a small increase for the quarter after the negative print seen at the end of 2011, but this was not the case, and this initiated the requirement for the Prime Minister to explain his budget programs to congress.  The Bank of England (BoE) is one of the few central banks still considering another round of monetary easing.

Technical Analysis:

The USD/CHF is following some of the other Dollar pairs and is caught in a descending triangle that looks as though it will break to the downside in the near term.  The next major level to the downside is seen at the 0.90 level which held on the last test.  MACD readings are in negative territory, which supports the downside test argument but with momentum starting to wane, it looks as though prices will find a bottom in this region.

The FTSE 100 is coming into the decision point of its symmetrical triangle, with more resistance seen over head giving an argument for a downside break.  Upside resistance includes the 100 and 200 period EMAs on the 4H charts, along with the 61.8% retracement of the latest decline on the same charts.  To the downside, the first target is seen at 5600, a break here will accelerate losses.

Equity futures in the US (suggesting a second consecutive day of gains) after Apple (AAPL) released corporate earnings and beat market expectations once again.  The positive performance was matched by other major names as well (Boeing was another example) ahead of the monetary policy meeting from the Federal Reserve.  Apple, however, was clearly the main story, as the stock rose more than 10 percent as Chinese demand for the iPhone helped bring an increase in quarterly profits of 94 percent.

Boeing was seen trading 2.6 percent higher, as their earnings report surpassed estimates as well on increases in commercial jet sales.  The strong reports helped keep the S&P 500 supported, as June futures contracts rose 0.6 percent to trade near 1380 during the session.  The Dow Jones Industrials are also modestly higher by 0.2 percent to trade just below the widely watched 13,000 level.

Corporate earnings continue to be one of the bright spots indicating economic recovery in the US, and, as a result the S&P 500 has seen a rally of more than 9 percent so far this year.  Macro data (especially jobs figures) have been supportive as well but the main story continues to be the performance in the corporate sector, as US companies are passing analyst estimates for earnings reports at the highest rates in more than 2 years.  So far, 82 percent of the companies listed in the S&P 500 have beaten earnings estimates in the current cycle, and yesterdays reports showed average profit increases of 12 percent.  Each of the 10 industry sectors in the index beat consensus estimates, as materials, financials and technology posted the biggest gains.

Essentially, these numbers are showing that the potential debt contagion from the Eurozone is having only a limited effect and today’s Federal Reserve meeting will provide the market with additional forecasts for GDP growth, inflation and jobs figures.  Other key issues during the meeting will center on the possibility of renewed quantitative easing or early increases in interest rates but at the moment, the market is not expecting any major shift in policy bias from what was seen during the previous meeting.  As of now, the Fed is expected to maintain near-zero interest rates into 2014 and any suggestion that this policy will end earlier could limit some of the gains seen in equity markets.

Technical Analysis:

The USD/CAD continues to operate within its descending triangle but it is becoming more and more apparent that we will see a downside break in the near term.  Prices are currently grinding through support seen at 0.9840 and a daily close here will suggest a full retracement of the latest rally on the daily charts.  From here, rallies are expected to be capped by 1.0040 but an upside break here would take pressure off of the downside.

The S&P 500 is now seen trading within a clearly defined range, with support coming in at 1350 and resistance now seen at the triple top at 1390.  These are now the clear areas to watch going forward, as an upside break will target the monthly highs at 1420 (a double top) and a downside break will accelerate losses, bringing a test of the 100 day EMA into focus.

Asset markets are trading mixed overnight, with Asian equities closing lower and European index futures seeing gains ahead of today’s macro data which will center on the Consumer Confidence survey, New Home Sales, and Richmond Fed Manufacturing report, which will come during the New York session.  The Dollar is also trading mixed against its major counterparts as political uncertainties prevail in both France and the Netherlands.  Both countries are conducting presidential elections and this is calling into question the level of political consensus that will be seen once new people assume their leadership positions.  The uncertainty that is being created will weigh most heavily on equity markets and high yielding currencies.

Both the Euro and Pound are trading sideways against the US Dollar, holding near the 1.3150 and 1.6130 levels, respectively.  The Aussie Dollar, however, did see bigger losses (of roughly 0.5 percent) as the first quarter Consumer Price Index (CPI) showed that inflation levels were lower than previously thought, and this is leading to renewed speculation that the Reserve Bank of Australia (RBA) will have the flexibility to lower interest rates at its next meeting.

In the UK, FTSE 100 futures are suggestive of a moderately higher open (showing gains of roughly 20 points) and today’s economic figures will be seen with the release of Nationwide Home Prices, Public Sector Net Cash Requirements and Public Sector Net Borrowing numbers.  Corporate earnings will be released from Associated British Foods, Highland Gold Mining, ARM Holdings, Highland Gold Mining, Smiths News, and Carrs Milling Industries.  In Japan, Nippon Steel was lower after Moody’s downgraded its unsecured debt rating by one notch to A2, and this matched the broader Asian indices which were negative on the day.

In the US, corporate earnings have once again been one of the main success stories, and in addition to the housing numbers released today, we will also see earnings reports from Apple, AT&T, United Technologies, 3M, Amgen, and McGraw-Hill Companies, among others.  Apple tends to get a lot of attention (indeed probably more than it deserves) when producing its earnings results so it would not be surprising to see this being one of the key drivers of sentiment in equity markets on the day.  Equity markets are looking vulnerable after recent rallies, and today’s earnings will likely set the trading tone for the remainder of the week.

Technical Analysis:

The AUD/USD remains caught in its daily downtrend channel, with prices continuing to make lower highs and lows en route to a test of key Fibonacci support at 1.0120.  We have already broken moving average support and with the MACD indicator showing prices in negative momentum, there is little else holding up the pair from a test of this level.  A modest bounce will be expected into this area but a break would be a very bearish event and suggest a drop back below parity.

The Nikkei 225 is coming into some very critical historical and Fibonacci support levels at 9415.  We have seen something of a bounce from this area on the first test but upward momentum was minimal and prices have since consolidated in sideways fashion.  A break here looks imminent and will be very bearish as this is also where the 100 and 200 day EMAs are clustered.  Any rallies should be sold, only a break back above 9700 turns the bias back to neutral.