The end of the third quarter ended with a whimper for US markets with a negative close yesterday but nevertheless US markets still managed to post their seventh successive positive quarter.
The same could not be said for European markets though which have struggled against a backdrop of low inflation, low growth and rising geopolitical concerns as sanctions against Russia hit economic activity across the region.
The German DAX posted its worst quarter since early 2012, while the CAC 40 posted its first negative quarter since Q2 of the same year, and as we head into Q4 the main question being asked by investors is whether or not the ECB will step into the stimulus vacuum being created by the retreat of the Federal Reserve.
Even the Italy FTSE MIB and the Spanish IBEX 35 have spent the last three months treading water, finishing in negative territory, as the recovery in Europe stalls and uncertainty grows as to whether the ECB has the ability, or the will to do anything further to try and supplement the actions taken last month to help prompt a recovery in prices and growth.
Yesterday’s surprise drop in core CPI prices to a five year low of 0.8% would appear to suggest that deflationary pressures are continuing to choke off demand, and are likely to increase the pressure on the ECB at this week’s press conference to look at further measures in the coming months.
Today’s manufacturing PMI data from Spain, Italy, France and Germany are expected to reinforce this weak narrative, though Spain and Germany are still expected to stay the right side of expansion at 52.3 and 50.3 respectively.
It is the second and third biggest economies in Europe in France and Italy that are the cause for the biggest concern, hobbled by vested interests and political paralysis, as economic activity continues to decline with figures of 48.8 and 49.5 expected to show contraction in September.
Politicians in both these countries continue to abrogate their responsibilities imploring the ECB to do more despite the fact that the euro is over 9% off its highs this year, and interest rates are at record lows.
The fact is even if the ECB undertook full blown QE which remains unlikely at this stage, unit labour costs in both Italy and France are significantly higher than their equivalents in Germany and Spain, making their economies extremely uncompetitive. To come into line prices will have to fall in these countries in any case, and the ECB can’t really do too much about that.
In the UK, yesterday’s upward revision to Q2 GDP was a welcome boost but it is Q3 we are most concerned about now, and there is a chance that the uncertainty created by a possible Scottish “Yes” vote may have curbed economic activity in September.
Today we have the latest manufacturing PMI numbers for September and there is a risk that the uncertainty surrounding the Scottish referendum may have prompted a slow down here. As it was, in August, we saw manufacturing activity slump to a 14 month low at 52.5, though expectations for the September number today are for a modest uptick to 52.7.
In the US the economic data continues to point to modest expansion but there is a concern that maybe there is a little bit of air coming out of the proverbial balloon after Chicago PMI and consumer confidence disappointed yesterday.
Today’s manufacturing ISM for September could well give a good steer towards Friday’s payrolls report with attention likely to be paid to the employment component in light of last month’s disappointing payrolls number. Expectations are for the headline number to come in at 58.5, down from August’s 59.
EURUSD – the decline in the euro continued yesterday breaking below its November 2012 lows at 1.2660 pushing down to 1.2570. 1.2660/70 should now act as resistance for a move towards the 1.2400 area. Above 1.2670 argues for a rebound towards the 1.2785 level which was the 61.8% retracement of the up move from 1.2045 to 1.3995, and was support on the move lower.
GBPUSD – the pound has thus far remained well supported just above the 1.6000 level but appears to be showing signs of sliding back again after slipping below 1.6270 late on Friday. Having lost some of its safe haven allure in the wake of the Scottish referendum it could well revisit the lows this month if we slip below 1.6150. Resistance comes in at 1.6280 and behind that at 1.6420.
EURGBP – the 2012 lows at 0.7754 continue to get closer while we remain below the 0.7875 level, which had shown some support earlier this year. This 0.7875 level should now act as resistance in the near term for further euro weakness towards levels last seen in October 2008 at 0.7690.
USDJPY – the US dollar’s next target is the 110.65 level which is the August 2008 highs after this month’s break above the 105.50/60 area. This break was hugely significant but we are looking increasingly overbought and at risk of a pullback. A move below 108.25 could well precipitate a sell off towards 107.00.
Equity market calls
FTSE 100 is expected to open 20 points lower at 6,603
DAX is expected to open 27 points lower at 9,447
CAC 40 is expected to open 18 points lower at 4,398
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