European stocks are set to open higher on Friday with the FTSE 100 seen gaining 11 points ahead of the release of the US monthly unemployment report.
There was some divergence between UK stock indices on Thursday with the FTSE 250 ending the day over half a percent higher whilst the FTSE 100 lost 0.5%. The divergence came about as a result of a surprise return to expansion for the UK manufacturing industry in August. Investors pulled funds out of multinationals exposed to a stronger pound and reallocated them into domestically focused firms that benefit from a resilient UK economy.
There is increasing evidence the British pound has bottomed, at least until Theresa May triggers article 50. Sterling surged on Thursday after the stronger data. GBP/USD leaped back above 1.33, having been below 1.31 on Tuesday. EUR/GBP has dropped back through 0.84, its lowest since the Bank of England cut interest rates on August 4. Taken as a whole, the economic data post-Brexit has held up well and the knee-jerk drop in confidence shown through survey data, including the PMIs, is now seemingly coming back to pre-referendum levels.
Manufacturing is only 10% of the British economy and has a strong export-bent which makes it particularly benefit from a devalued British pound. The UK services PMI on Monday is the big one. Brexit doom-mongers can't attribute the surge in the manufacturing PMI purely to the drop in Sterling if services see a big rebound too. A rebound in both services and manufacturing would suggest the UK economy has been resilient to any ‘uncertainty’ surrounding the EU vote. It would also make another near-term cut in UK interest rates unlikely. If anything the Bank of England should reverse its decision and hike rates back to 0.5%.
With the slump in homebuilder shares in the wake of the Brexit vote pushing Berkeley Homes out of the FTSE 100 this week, UK construction PMI will be an important indicator for the sector and for the UK economy at large. Expectations are for a pickup to 46.1 in August from 45.9 in July.
US stocks finished narrowly lower on Thursday with volatility still compressed ahead of today’s non-farm payrolls report and the long Labour Day holiday weekend. Oil was the main difference-maker as prices slumped over 3% dragging the energy sector lower.
US manufacturing unexpectedly slumped back into recession. Notably, rather than rallying on the weak US manufacturing data because it reduces the chance of a Fed rate rise, stocks fell alongside the US dollar. Investors took the weak data as a sign that the US economy is too fragile to withstand the rate hike signalled by Fed policymakers at Jackson Hole.
Some attention has been drawn to Fed Chair Janet Yellen’s wording at Jackson Hole that a rate hike depends on whether data “continues to confirm” the Fed’s outlook. Consensus forecasts for today’s unemployment report is 180k but it may just take 150k to step over what could be a lowered bar for the Fed to hike in September.
EURUSD – The euro gained for a second day on Thursday after finding support at the August 12 swing low and 200 DMA at 1.1130. Potential resistance from 1.12 then 1.1245
GBPUSD – Sterling has rallied from the 1.3060 pivot and taken out the August 26 swing high. The new high confirms the uptrend. Possible resistance at 1.3370 with support at 1.32
EURGBP – The euro Sterling pair has continued its break below rising trendline connecting the July 14 and August 24 lows. Potential support near 0.8340 with resistance at 0.8485.
USDJPY – Dollar yen has pulled back from 104 after a strong rally over the past week with a potential bearish evening star candle pattern. Support could come in at 101.85 with 104 now resistance.
Equity market calls
FTSE100: to open 11 points higher at 6,756
DAX: to open 18 points higher at 10,552
CAC40: to open 8 points higher at 4,447
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