US markets have started the new week and quarter in the same way they finished the previous one, posting new record highs. These gains have been led by the small cap Russell 2000 which has made almost parabolic gains in the past couple of weeks, gaining over 5%, on expectations of progress on tax cuts and, or reforms.
Yesterday’s break outs were also helped by a surprisingly strong ISM manufacturing survey for September, which showed no signs of any impact from the disruption caused by the recent hurricanes in the south east of the country.
The headline number was the strongest since June 2011, while prices paid also showed the biggest gains since May of the same year, rather begging the question as to when this inflationary pressure is likely to get passed down through into the inflation numbers.
The strength of the numbers also reinforced the expectation that we will probably see the US Federal Reserve pull the trigger on another rate rise before the end of the year at its December meeting, pushing the US dollar index to a six week high.
Equity markets in Europe also enjoyed a decent day on the back of a weaker euro and similarly decent manufacturing numbers for October, with the Eurostoxx 50 hitting its highest level since the beginning of June. The DAX also looks on course to post new all-time highs though that may have to wait given today is a market holiday in Germany.
Markets in Spain were the exception after the violence of weekend events in Catalonia pushed the Spanish stock market sharply lower, though it still remains above its September lows, and closed well off its lowest levels of the day.
While equity markets in general may well be able to shrug off these events, what happened in Catalonia at the weekend could well weigh on investor appetite for risk in Spanish markets, after Prime Minister Rajoy’s political miscalculation on Sunday’s vote. The European Union doesn’t come out of recent events with much credit either, more or less endorsing the Spanish governments actions, in an attempt to try and stay neutral. As the head of a minority government already, Rajoy may find that his political capital is more or less spent if a solution can’t be found to the current impasse, between the authorities in Catalonia.
One thing appears certain, more of the same is only likely to make matters worse, and worsen the constitutional crisis in Spain.
The pound had a disappointing day and looks on course for its third consecutive weekly decline after manufacturing PMI for September came in slightly below expectations. Nonetheless it still pointed to a strong end to Q3 for the UK economy even if momentum does appear to be slowing. Sentiment around the pound probably wasn’t helped by a pretty lacklustre speech by the Chancellor of the Exchequer at the Tory party conference, which business leaders described as “strong on diagnosis but weak in detail.” The feeling from business appears to be that it’s all well and good to criticise the Labour opposition, but at least offer some form of credible alternative.
The construction sector has been a bit of weak spot for the UK economy in recent months and today's September construction PMI is expected to come in at 51.2. This weakness may help explain the weekend announcement of an extension of “help to buy” but while house builders may welcome the extension it does little to address the supply and affordability problems.
EURUSD – continues to remain under pressure and having slipped below the 1.1715 area looks set for a move towards the 1.1600 area. Only a move back above the 1.1830 area has the potential to stabilise and argue for a return to the 1.1920 area.
GBPUSD – slid below the 1.3340 area and looks set to push pack towards the 1.3220 area, with a break targeting the 1.3120 level.
EURGBP – have seen the euro push back through the 0.8830/40 which means we could head back towards the 0.8900 area. A move through here targets a move back towards the 0.8970 area. Support remains back at the recent lows at 0.8740.
USDJPY – still finding selling interest just above the 113.00 level after last week’s failure at the 113.20 level, but feels like we could extend towards 114.00. A failure here retargets the 112.20 level and below that a return towards 111.30.
FTSE100 is expected to open unchanged at 7,438
CAC40 is expected to open 8 points higher at 5,358
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