After eight days of gains it was perhaps not so surprising that the FTSE100 slipped back yesterday, and that it was the mining sector that drove those losses ahead of this morning’s Chinese trade data, as well as a sharp decline in oil prices after OPEC announced in its latest numbers that output climbed to a three year high in September.
The deterioration in recent Chinese trade data has reinforced concerns about the health of the Chinese economy as sliding commodity prices and weak consumer demand has seen both imports and exports slow much more than expected in the months since June.
This weakness has been all the more surprising given the number of times Chinese officials have eased policy this year. In July imports declined 8.1% and 14.3% in August reflecting weak domestic internals inside the Chinese economy, while exports weren’t much better as the strong yuan undermined Chinese competitiveness.
Exports showed declines of 8.3% in July and 6.1% in August, and though we’ve seen the Chinese currency weaken since August some of that weakness has been eroded in the weeks since Chinese authorities moved the yuan trading band to help offset some of the yuan strength seen in the last 12 months.
Even allowing for the disruptions caused by the Tianjin warehouse blast in August today’s latest September trade data doesn’t appear to give much indication that the Chinese economy is showing any significant signs that we are seeing a significant trickledown effect from the recent stimulus measures.
While September exports showed a slight improvement declining 3.7%, imports once again dropped sharply, and much more than expected by 20.4%, well outside expectations of 15.9% reinforcing an expectation that we could well see more stimulus in the weeks ahead. The numbers also suggest that next week’s GDP could well come in well below the 7% threshold targeted by Chinese officials as their GDP target. While exports were slightly better than expected the numbers would appear to underscore the fact that the recent decline in the yuan hasn’t had the effects policymakers expected it might.
In the UK we have the latest September inflation numbers which aren’t expected to move the dial that much in terms of rate hike expectations, with the headline rate expected to stay anchored around 0%.
In the case of core and retail prices we are expecting to see a modest uptick to 1.1% from 1%, but overall markets will probably be more interested in what MPC policymaker and dissenter Ian McCafferty has to say with respect to his reasons for looking to push rates higher despite the weaker than expected data seen so far in Q3 across all UK sectors with respect to the PMI data seen earlier this month.
We could also get an insight into new MPC member Gertjan Vlieghe’s thoughts on the UK economy when he speaks for the first time in his capacity as an external MPC member, to the Treasury Select committee. He can also be expected to be grilled over his links to his previous employer hedge fund Brevan Howard over potential conflicts of interest when he was first appointed.
After the latest UK inflation numbers we will be getting the latest snapshot of German ZEW investor sentiment for October and given recent events surrounding Volkswagen (DE:VOWG) it isn’t likely to be pretty. The damage to the German brand cannot be underestimated here and while expectations are for a decline from September’s reading of 12.1 to 6.8, it wouldn’t be surprising to see an even steeper fall.
Given the linkages to other areas of the German economy and the trickledown effect to the automakers supply chains, it wouldn’t be unexpected to see an even sharper decline given that as many as 1 in 6 German jobs depend on the automotive sector.
As such today’s ZEW number will be the first economic sentiment indicator as to possible spill over effects this drama surrounding Volkswagen is likely to have on the wider German economy in the weeks and months ahead at a time when their appears to be some evidence that growth may well be slowing in the euro area.
EURUSD – the euro has continued to build support above the 50/100 and 200 day MA’s at 1.1150, but really needs to push beyond the September high at 1.1470 to suggest a return to the 1.1700 level seen briefly in August. Support is expected to come in at the 1.1220 level
GBPUSD – last week’s rally to 1.5380 was a welcome sign that we may have seen a short term base for the pound. Ideally we need to see a move beyond the 1.5425 area to argue for a return to the September highs at 1.5630. Pullbacks need to stay above the 1.5220 area to reassure or we could slip back towards the lows this month at 1.5110.
EURGBP – continues to fins progress difficult beyond the 0.7430 area. We need to see a move beyond the May highs at 0.7485 to suggest further progress to the upside. There appears to be solid support at last week’s low at 0.7330.
USDJPY – remains uninspiring with resistance near the range highs of the past few weeks around the 121.00 area. Support remains at the recent range lows just below 118.80. We need a break of these levels to suggest a direction for the next move with a move towards 116.00 the preferred direction.
Equity market calls
FTSE100 is expected to open 10 points lower at 6,361
DAX is expected to open 4 points lower at 10,115
CAC40 is expected to open 8 points lower at 4,680
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