European stocks look set for a lower open on the first day of trading in 2016 after Chinese manufacturing data recorded a surprise drop further into contraction. The Caixin manufacturing PMI came in at 48.2 for December, down from 48.6 when a rise to 48.9 was expected.
The intermitting days between Christmas and New Year’s saw stocks in Europe essentially unchanged. The late Santa rally wasn’t enough to prevent a down-month for December. The FTSE 100 rose to a three-week high and above 6,300 on December 29th, only to erase all the gains on the 30th.
All-in-all it has been a pretty disappointing year for the UK stock market. The FTSE 100 lost 4.9% in 2015, pretty poor when compared to the 9.8% gain for the German DAX and 8.5% gain for France’s CAC 40but in line with the 2.2% fall in the US benchmark Dow Jones.
Trading in the first few days of 2016 will likely be shaped by investor’s determination whether the New Year will see a continuation or an end to the driving forces in 2015. Namely, concerns over China’s slowdown, the commodity crunch and rising US interest rates.
China’s latest PMI data implies more stimulus may be required in 2016. The surprise monthly drop in the Caixin report comes off the back of the official manufacturing PMI that saw factory activity shrink for the fifth month in December with a reading of 49.7, up slightly from November. A big swing factor for this coming year will be whether Beijing makes better use of its ability to stabilise the Chinese economy. The government has been walking a tightrope of growth stabilisation and economic reform. The way Chinese authorities lean in 2016 could determine whether market’s have a good year or not.
BP (L:BP) chief Bob Dudley’s idea that oil could hit a low point in first quarter seems entirely feasible as bears ease up in the unlikely event that Brent crude sees anything like another -37% drop in the New Year. The price of crude jumped to a 2-week high on Monday as Brent traded back over $38 p/b. Higher crude prices may cushion some of blow from the disappointing Chinese data.
The initial reaction to US rate rise in December was a little jumpy in US markets but it has been taken with relative calm overseas. This sense of calm could remain after Fed Vice Chair Stanley Fisher said new tools used to lift rates off zero have worked in a speech on Sunday.
China’s manufacturing data will set the tone for markets on Monday but PMIs from the UK, Eurozone and US could have the final say. Manufacturing in the UK is expected to have improved in December with a rise to 52.8 from 52.7 in November. The December US ISM survey is expected to show US manufacturing remains in contraction, although improved to 49.1 from 48.6 in November.
The two biggest positives for 2015 stock market returns were quantitative easing from the European Central Bank and the Bank of Japan. The belief that a big increase in stimulus is coming from either institution took a blow in December when both the ECB and BOJ introduced underwhelming extra measures at the latest policy meetings. Any justification for the ECB doing more could be further undermined by more evidence of a base in German inflation data. German CPI is expected to show a 0.2% m/m rise in consumer prices for December, up from 0.1% in November.
EURUSD – The euro could be forming a head and shoulders pattern with a neckline at 1.08. Should 1.08 break, there could be a swift decline towards 1.06. A decisive break of 1.10 is the game-changer that could see the pair eventually hit the October peak of 1.15.
GBPUSD – The pound fell to a fresh 8-month low on December 31. The pair is in an obvious downtrend. Major support rests at the April low at 1.4580.
EURGBP – The euro-sterling cross has twice failed to close above 0.74. After a swift rally from 0.70, there is a chance of a pullback. The pair may be in the process of a long term triple bottom pattern with a neckline at 0.75.
USDJPY – The psychological 120 level is providing some support. The sharp move on December 18 favours a break lower towards 118.70, the October 2 low.
Equity market calls
FTSE100: to open 66 points lower at 6,176
DAX: to open 210 points lower at 10,533
CAC40: to open 54 points higher at 4,583
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