European equity markets look set to post their worst quarter since 2011 and their second monthly decline in succession, despite seeing a rebound this morning as concerns about a slowing global economy, uncertainty about the Chinese economy and the prospect of a US rate rise, causes investors to re-evaluate their strategy of choice of the last 6 years.
The “buy the dip” strategy, has by and large, worked extremely since 2009, and despite some brief pockets of uncertainty the move higher has been pretty much uninterrupted.
Given the volatility seen in the past couple of months there is a feeling that something may have changed with the slow slide in commodity prices since the peaks of 2011, starting to sow some significant seeds of concern, about where the next catalyst for a move higher will come from.
When commodity prices bottomed in 2008, the combined effects of a Chinese stimulus program and US quantitative easing saw a swift about turn in prices in a matter of months.
It’s hard to see something similar happening now with oil and mining companies taking a scalpel to capex in large chunks. Furthermore investors are having to contend with a US Federal Reserve looking to tighten policy and not loosen it, raising concerns about the debt profiles of a good part of the basic resource sector, at a time when revenues are likely to remain under pressure due to low prices.
While commodity prices may rise eventually there still remains a great deal of excess capacity in the mining and oil and gas sector, which still needs to be worked through.
It is against this backdrop that global equities have fallen sharply, and combined with the scandal surrounding Volkswagen (XETRA:VOWG), amidst concerns that its peers could well get dragged into the whole imbroglio, investors are voting with their feet and reverting to cash and other safer havens.
On the economic data front we have a host of data to digest from the UK, Europe and the US starting with the final iteration of UK Q2 GDP which is expected to be confirmed at 0.7%
We will also be getting a snapshot of the German economy, though all of this is likely to be a snapshot before the VW business flared up. Nevertheless we saw German CPI go negative yesterday as lower oil prices translated into weaker prices, which in theory should boost retail sales spending.
To an extent it has but German consumers are a conservative bunch and retail sales for August are expected to only rise 0.2%, down from 1.6% in July.
September unemployment is expected to remain unchanged at 6.4%
In Italy some of the recent PMI data has been encouraging which should give some optimism that the unemployment rate might well start to come down. The big question is will the recent upgrades to Italy’s growth outlook translate into a fall in unemployment from 12%. EU Unemployment is expected to stay unchanged at 10.9%
The bigger concern remains around inflation and given Germany’s negative number yesterday there is a good chance that EU CPI could go negative for September, though core prices are likely to remain at 0.9%. A negative number will no doubt have the QE brigade out in force once more calling for extra stimulus, missing the point that the ECB can do very little about low energy prices and falling wages.
Attention then switches to the US economy and the September ADP payrolls report which is expected to come in around the same level as August at 190k.
With all the uncertainty around when the Fed will raise rates, with this weeks Fed speakers keeping the October option still alive, attention will be particularly focussed on the US manufacturing sector which has shown significant weakness around the Fed regions in the last month. With contractions in the Empire, Philadelphia, Richmond and Dallas Fed regions in the last two weeks the latest Chicago manufacturing PMI for September is expected to come in at 53, which seems rather on the optimistic side.
EURUSD – while the euro remains above the 50 day MA at 1.1140 the potential for a move back towards 1.1400 remains. Only a move below the lows this month at 1.1080 suggests a move back towards 1.0820.
GBPUSD – continues to find it difficult to rally declining for the eighth day in a row, which increases the risks of a move towards the 1.5000 level. The 1.5125/30 area continues to act as support for now. We need to recover back through the 1.5330 area to stabilise and suggest a return to the 1.5400 area.
EURGBP – we’ve pushed through the 0.7420 area and August highs, but are struggling to follow through on it, and need to hold above 0.7380 to do so and argue for a move to the May highs at 0.7485. Below the 0.7320 area retargets a move towards 0.7240.
USDJPY – the failure to break beyond the 121.30 area has seen the yen move lower as the recent range trading price action continues to compress the price action. Trend line support now comes in at the 119.20 area. The US dollar still looks vulnerable to a return to the 116.20 area seen a few weeks ago.
Equity market calls
FTSE100 is expected to open 73 points higher at 5,982
DAX is expected to open 125 points higher at 9,575
CAC40 is expected to open 58 points higher at 4,401
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