Yesterday’s gains in broader European markets turned out to be somewhat of an exception as under pressure commodity prices and weaker Chinese data weighed on UK and US markets.
Attention was also fixed on the Greek stock market as it reopened after a five week hiatus, plunging sharply on the open, losing 23% of its value before closing 16% down, while the Greek banks got absolutely battered, closing limit down 30%.
Sentiment wasn’t exactly helped by the worst manufacturing PMI number ever, coming in at 30, well below the economic breakeven level of 50, and throwing into sharp focus the damage done to the Greek economy in the last few weeks, by political uncertainty and the ongoing capital controls.
The severity of the decline suggests that any bailout is likely to come in well above the €86bn numbers being bandied about, which in turn is likely to make any discussions about debt relief even more contentious. Any increase in tensions as we get closer to the €3.2bn ECB repayment date on 20th August is likely to see Greek banks come under further pressure in the coming days.
A weak Chinese manufacturing indicator also prompted a sharp sell-off in Asian markets yesterday, while the Reuters CRB Commodity index fell to its lowest levels in 12 years, with crude oil prices leading the way lower, as the US dollar continued to gain ground, and growth concerns remained front of mind, with commodity currencies getting hardest hit. Both the Australian and Canadian dollar have suffered in recent weeks and the pain could well continue, given the current direction of travel.
The rise in the US Dollar was particularly puzzling given some of the weaker than expected US data seen in the past day or so. A weaker than expected Q2 employment cost index on Friday undermined the narrative pointing to a September rate rise, as did a weaker than expected ISM manufacturing survey for July yesterday with the prices paid component in particular showing a steep drop.
For all these warning signs the main market focus continues to point to Friday’s payrolls report, and US markets continued to feel the pressure, falling heavily last night, with Apple shares (NASDAQ:AAPL) falling below their long term 200 day MA for the first time since September 2013, as investors expectations continue to shift towards a move on rates next month, though investors should be aware of the lack of confirmation currently being shown in the bond market.
The pound will be in focus once again today with the release of the latest construction PMI data for July, in the wake of yesterday’s rebound in the manufacturing PMI from a two year low.
Expectations are for the construction sector to improve from 58.1 to 58.6, in the process shifting the focus to this week’s latest Thursday trifecta of Bank of England rate meeting, minutes and inflation report.
It is one of the markets little mysteries that while investors have been obsessing about a US rate rise for most of this year, an economy that has consistently outperformed it for most of the year has no such expectation. The UK economy currently has a participation rate well in excess of 70%, in contrast to the US’s multiyear low levels, similarly low unemployment, and fairly strong growth rates, yet expectations for UK rates are out into Q1 next year, due to low inflation, while wage growth in the UK is far outstripping the US.
Bizarre doesn’t even cover it, but who said markets had to make sense!
EURUSD – the euro continues to be range bound with an upper boundary just above 1.1100 and support down near 1.0800. A move through 1.1030 is needed to retarget last week’s high while a move below 1.0800 could well signal a move towards 1.0600.
GBPUSD – the 1.5680 level remains a key resistance on the upside after another failed attempt last week. Support remains down at 1.5550 trend line support from the 1.4565 lows, as well as the 200 day MA at 1.5410. A move above 1.5700 has the potential to retarget the 1.5820 level.
EURGBP – despite last week’s rally to the 0.7120 area the euro remains under pressure, but as long as we stay above the 0.6980 level we could get a rebound. A move below the 0.6980 level argues for further losses towards the 0.6930 lows. This remains the probable outcome unless we can get back above the 0.7040 level.
USDJPY – another run at the 124.50 level saw the US dollar run out of steam last week before slipping back. This remains the key resistance level on the upside, with a through here retargeting the 125.85 highs. Support currently comes in at 123.00 for now, while below that we could see a move towards 122.50.
Equity market calls
FTSE100 is expected to open 23 points lower at 6,665
DAX is expected to open 38 points lower at 11,405
CAC40 is expected to open 18 points lower at 5,102
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