European stock markets have got off to a flier so far this year, the FTSE100 is already up by over 5%, with the prospect we could see new record highs as soon as this week.

The FTSE250 has also got off to a similarly strong start, while over the other side of the Channel, Germany’s DAX, and France’s CAC40 are both up over 8%, with both having rallied around 20% in the last 3 months.  

The catalyst for this remarkable turnaround in fortunes appears to be a combination of falling prices, warmer weather, and better than expected trading statements from a host of companies, after the widespread pessimism that characterised a lot of the narrative in the lead up to Christmas.

Last week this more buoyant tone was given added legs by better-than-expected economic numbers that showed that the UK economy may well avoid an economic contraction in Q4, and ergo, a technical recession.

We also saw the latest US CPI numbers come in line with expectations, which reinforced a narrative that could see the Federal Reserve take another step-down in the pace of its rate hiking cycle to 25bps when it meets in just over 2 weeks’ time.

This is by no means guaranteed, and while some Fed policymakers have made the argument that they would be happy with another slowdown in the pace of rate hikes, others like St. Louis Fed President James Bullard have suggested that it might not be such a good idea.  

Of course, all of these assumptions are based on a premise that the current slide in energy prices can be maintained and that European gas storage can remain high. It is also based that any Chinese economic reopening won’t drive a sharp rebound in inflationary pressures, neither of which is a slam dunk.

US markets also finished the week strongly, ahead of today’s Martin Luther King Holiday, posting their best week since early November, closing on the highs of the week, but crucially still within the downtrend they’ve been in for the last 12 months, although it is notable that while the Dow has seen a strong rebound off its October lows, the S&P500 and Nasdaq 100 have not.

As we look ahead to a new week, European markets look set to open higher, with the main focus this week being on the UK economy, having seen a better-than-expected November GDP number on Friday, with the latest unemployment, wages and inflation data for November and December, due out tomorrow and Wednesday.

We’ll also be getting a snapshot of how badly the Chinese economy was affected by the various lockdowns and various restrictions during Q4, when the latest GDP numbers are released tomorrow, along with the continuation of the US earnings season.

The first proper World Economic Forum since Covid is also back in its usual January slot, getting under way in Davos today. We will no doubt get the usual hot air and hand wringing from the usual suspects of central bankers, politicians and business leaders who collectively appear to have run out of ideas about how to deal with the problems facing the world, and in the absence of those ideas, pander to the loudest voices.    

EUR/USD – last week’s move through the June highs at 1.0787, now opens up the prospect of a move towards 1.0950 which is a 50% retracement of the move from the 2021 highs to last year’s lows at 0.9536. A move through 1.0950 opens up a move towards 1.1110.

GBP/USD – last week’s move through the 1.2200 area has been far from convincing, despite the decent rebound from the 1.1830/35 area. The next big resistance lies at the 1.2350 area. We need to hold above the 1.2000 area for further gains to unfold.

EUR/GBP – slipped back from 3-month highs at 0.8895, however momentum remains positive, and needs to hold above the 0.8820 area to argue for a move towards the 0.9000 level. Below 0.8820 targets the lows last week 0.8770/80 area.

USD/JPY – continues to slide back with the move below 129.50 opening up a test of 126.50 which is the 50% retracement of the up move from 101.18 to the highs at 151.95. Below 126.50 targets the 120.60 area.

FTSE100 is expected to open 5 points higher at 7,849

DAX is expected to open 67 points higher at 15,143

CAC40 is expected to open 23 points higher at 7,046