Yesterday there was further evidence the global economy is cooling down. Broadly disappointing services data from Europe as well as the US added weight to the argument the world economy is dropping down a gear.
The final reading of services PMI reports for Germany, and the UK was 51.4 and 49.5, respectively. The German update was the smallest rate of expansion in eight months, and the British reading was the lowest in six months. Earlier in the week, Germany posted dreadful manufacturing figures, so it is clear the largest economy in Europe is suffering. The last time the UK services sector was in contraction was March – when the UK was supposed to leave the EU, so it fair to say that consumers are cutting back on their spending in the run-up to Brexit.
The sharp decline in global stock markets on Wednesday was accelerated by the poor US ISM manufacturing figures. The reading was the weakest in 10 years, and it is fair to say that traders were given a rude awakening. The update highlighted the that fact the US-China trade spat is impacting the US too. The US ISM non-manufacturing cooled from 56.4 to 52.6 – the lowest level in three years. The news initially drove US equity benchmarks lower, but a rebound was staged, and the major indices finished higher. Stocks in Asia have muted ahead of the US jobs report, which is due out later today.
The US non-farm payrolls report will be posted at 1.30 pm (UK time), and it could make or break for market sentiment. The headline reading is tipped to be 145,000, which would be an improvement on the 130,000 posted in August. The unemployment rate is expected to hold steady at 3.7%. Average earnings are also tipped to hold steady at 3.2%. Lately, the earnings component has been more closely followed as workers who earn more tend to spend more.
This week we largely saw not such impressive job data from the US. The ADP employment rate showed that 135,000 jobs were added, and the August reading was revised down to 157,000 from 195,000. The latest jobless claims reading ticked up to 219,000 from 213,000. There are concerns about the health of the US economy, so a subpar jobs report today could spark another round of selling.
The weakness in the US dollar helped EUR/USD plus GBP/USD. Worries, the Fed will need to cut interest rates again weighed on the US dollar. Sterling enjoyed a broad move higher yesterday, and it was as if traders didn’t feel a no-deal Brexit was likely.
There is a question over whether Boris Johnson's proposals will be accepted by the EU, but for now, dealers seem to think a deal will be managed or at least an extension will be granted. There was a report circulating that the EU has given Mr. Johnson one week to revise his proposals as they don’t meet their standards.
Oil like stocks initially sold-off sharply in the wake of the ISM non-manufacturing, but it managed to pull back a large portion of the losses. Oil is a good barometer for the health of the global economy, and the poor economic indicators posted this week point to softer demand in the future.
EUR/USD – remains in the wider bearish trend, and if the negative move continues, it might target 1.0800. A snapback might encounter resistance in the 1.1100 area.
GBP/USD – has been pushing lower for over one week, but if it holds the 50-day moving average at 1.2253 could pave the way for 1.2600 to be retested. A move to the downside might bring 1.2200 into play.
EUR/GBP – while it holds above the 200-day moving average at 0.8833, the outlook should remain bullish, and 0.9000 might act as resistance. A break below 0.8786, might put 0.8724 on the radar.
USD/JPY – since mid-September, it has turned lower, and while it holds below the 50-day moving average at 107.25, the bearish move might continue, which could pave the way for 106.00 to be retested. 108.47 might act as resistance to a positive move.
FTSE 100 is expected to open 48 points higher at 7,125
DAX is expected to open 60 points higher at 11,985
CAC 40 is expected to open 32 points higher at 5,470
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