With European equities set to open mixed this morning; the theme that is now starting to dominate markets across the globe is strength in the US Dollar which is sending other major currencies and commodities crashing while also threatening to derail earnings from US multinationals.
With the US, the largest economy in the world having gone through an unprecedented period of monetary easing, focus is obviously sharply tuned on any signal from the Federal Reserve as to when it will end. The assumption is that with such strong growth in Q2 and unemployment at 6.1%, the US, even with a dovish Fed is closer to hiking rates than most western economies and that has sent the USD flying.
The risk to the dollar rally is twofold; the economic data deteriorates and/or the FOMC remains dovish. Two key Fed hawks, Fisher and Plosser are leaving next year so that supports a dovish Fed. There are also signs that the strong dollar may push down US inflation, CPI has slowed and today the Fed’s preferred inflation gauge, core PCE is likely to remain at 1.5% or lower.
The rest of the week could end up as a gradual build-up to Friday’s non-farm payrolls report that will give investors an idea whether the 142k print in August was a one-off or the start of a trend of slower job growth.
As the world’s second largest economy and the biggest contributor to global growth it makes sense that the other focus for markets has been the slowdown in China. The Communist government has a tight grip on its economy and its politics but this weekend’s protests for democracy and resulting police tear-gassing of protestors in Hong Kong is a reminder that caution should be exercised in assuming this grip is unbreakable.
It is “National day” in China Wednesday onwards but PMI data throughout the week is expected to show a further slowing of the economy in September.
Supporting the strength of the dollar has been weakness in the euro. Germany, Europe’s largest economy has seen months of deteriorating business and investor confidence and that has now started to translate into hard economic data. Further evidence of Germany’s slowdown will likely come today from the monthly CPI report expected to show deflation in September. The entire Eurozone on Tuesday is expected to continue spluttering along with 0.3% annual consumer price inflation.
The ongoing low inflation is the reason ECB President Draghi is pointing the Eurozone’s economy towards what the Fed is coming out of, namely quantitative easing. The policy has not been announced but recent comments from Draghi as well as the planned ABS purchases have sent the euro to 22 month lows on speculation that QE could start as early as this Thursday’s ECB rate-setting meeting.
There may be more scepticism over the prospect of the ECB introducing QE than would be suggested by the collapsing euro. European stock markets, while close to multi-year highs thanks to the Fed-supported global rally in stocks are not making new highs as would likely happen if the ECB was genuinely expected to start printing money.
The German DAX having broken 10,000 is now hovering around 9,500 and has been as low as 8,900 thanks to the ill-effects of sanctions on Russia and a tepid recovery across the Eurozone.
For UK stock markets, Saga (ST:SAGAa), the over 50s insurance group, will post its first set of results today since its flotation but the big event of the week after the Tesco (LONDON:TSCO) fiasco will be rival Sainsbury(J) (LONDON:SBRY)’s trading update on Wednesday.
EURUSD – The euro closed the week below 1.2750, the lows from March and July 2013 which could now act as resistance on any bounce. The trend is distinctly down and a break below 1.2660, the November 2012 low would put the pair at 2 year lows.
GBPUSD – Having broken its short term rising channel, a potential bear flag on the daily chart indicates further declines to test the 1.61 lows with possible support ahead of that from 1.6160, the low from Sept 16.
EURGBP – euro sterling formed a spinning top on Friday demonstrating uncertainty about the 0.78 handle. The pair has traded through 0.78 and came 30 pips short of 0.7755, the low from July 2012 but has not yet managed a lower close.
USDJPY – Dollar yen is consolidating around 109 but the bullish engulfing candlestick on Friday, undoing the bearish engulfing from Thursday is a sign of a move toward 110. A close below 108.25 would be short term double top and could set off a sharper correction, perhaps down to 105.
Equity market calls
FTSE 100 is expected to open 5 points lower at 6,644
DAX is expected to open 20 points higher at 9,510
CAC 40 is expected to open 8 points higher at 4,402
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