In a week dominated by central bank decisions from the Reserve Bank of Australia, Bank of Canada and the European Central Bank the weekend has once again been dominated by a provocation from North Korea after the country conducted yet another nuclear test, prompting the now habitual political condemnation from the US, South Korea and Japan, along with a pretty blunt statement from US defence secretary James Mattis that while the US is not looking to the total annihilation of North Korea it “has many options to do so.”
Once again the actions of North Korea have increased the pressure on China, its closest economic and political ally, and while the Chinese on this occasion did condemn the actions in fairly strong terms, the fact that North Korea deliberately chose to embarrass China in this way does raise the prospect that China’s influence may well be waning with its closest neighbour, despite its importance as North Korea’s energy lifeline. The detonation was all the more embarrassing given that Chinese President Xi, was hosting an important BRICs summit at the same time.
It would seem that North Korean leader Kim Jong Un doesn’t care that much for what either the US or China think about what he does, which is a little worrying as it increases the prospect of further escalations and brings the potential for a further flare-up that much closer.
Not surprisingly we’ve seen Asia markets slip back and we look set to open lower here in Europe this morning, while the Swiss franc and gold gain ground as haven trades come into play along with yet another counterintuitive move into the Japanese yen, a rather strange trade given Japan’s proximity on the front line of any potential flashpoint.
There wasn’t too much to be positive about from Friday’s US payrolls report coming in as it did at the low end of expectations at 156k, while the previous month was also revised lower to 189k. While it is true that August generally tends to be a weak month this weakness usually manifests itself across to the ADP report as well. When we saw weak numbers in August last year, and the year before, the ADP reports were also similarly weak, which makes Friday’s low number all the more surprising given that last week’s ADP number was at 237k.
It is true that 156k isn’t the end of the world, and it could still get revised higher but with the unemployment rate ticking higher to 4.4%, we didn’t even get the benefit of any significant upward pressure on wages, which might have suggested that the US labour market was starting to tighten up.
The low payrolls number was all the more puzzling given how strong the employment component of the ISM manufacturing report was, coming in at 59.9, up from 55.2 the previous month.
Ultimately the numbers have muddied the waters further with respect to whether we’ll see another US rate rise this year or not, and make the ECB’s job of keeping a lid on the euro that much more problematic, though judging by a report on Friday it would appear that these concerns are already prompting some discomfort at ECB headquarters, after it was revealed that policymakers may well not outline a plan until the December meeting, on what will happen with respect to the current asset purchase programme when it is scheduled to run off at the end of this year.
This reluctance is borne of a 14% rise in the value of the euro this year alone, as economic conditions in Europe improve, while the shine comes off the US dollar, which in turn is making it much more difficult for the ECB to meet its inflation target.
In the UK the manufacturing sector continues to go from strength to strength, at least as far as the PMI data is concerned after another strong performance in August built on the gains seen in the previous three months. Today’s it’s the turn of the construction sector, where the performance has been a little more lacklustre in recent months, nonetheless an improvement to 52.1 is expected from 51.9 in July.
EURUSD – the failure to move back above the 1.2000 level on Friday could well suggest we’ve seen a short term peak with a move back towards the 1.1820 level, and a break targeting the 1.1600 area. Above 1.2000 retargets the 1.2070 peaks.
GBPUSD – bias remains to the upside while above the 1.2850 area with resistance at the 1.3040 area. Longer term support remains at the 1.2770 level but we need to push through 1.2980 to keep the momentum intact.
EURGBP – the break of the 0.9180 area opens up the risk of a move back towards the 0.9040 area, and a short term peak. It would take a move back through the 0.9230 area to stabilise and retarget the 0.9300 area.
USDJPY – still in a range with solid support down near the 108.20 area for now and April lows and this is currently containing the downside. Rebounds need to get back above the 111.00 area, otherwise we remain at risk of a move towards the 106.80 area.
FTSE100 is expected to open 12 points lower at 7,426
DAX is expected to open 52 points lower at 12,090
CAC40 is expected to open 22 points lower at 5,101
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