The rebound in equity markets continued apace yesterday as investors shrugged off weak manufacturing PMIs from China, Europe and the UK and chose instead to focus on the continued resilience in crude oil prices as well as some slightly better than expected US economic data.
The continued rebound in commodity prices is all the more welcome given solvency concerns about some of the more leveraged firms in the sector.
The recovery in copper, iron ore and oil prices has been a key arbiter in the rebound seen in mining and oil and gas stocks over the past few weeks, and the recent recognition by Chinese authorities that steps need to be taken to cut back on the overcapacity in the sector do appear to have also helped sentiment.
This week’s announcement by the Chinese social security minister Yin Weimin that up to 1.8m coal and steel workers, 15% of the total sector workforce could go over the next few years, appears to be the first indication that China is finally facing up to the problems in its SOE’s, though it remains to be seen how quickly these could transpire.
Another reason why we’ve seen a stabilisation in equity markets appears to be as a result of the stabilisation in the yuan. Against both the US dollar and euro it is now back at levels seen at the end of December, before the sharp sell off at the beginning of the year.
The big question is how long Chinese authorities will tolerate this rebound in the yuan before markets start to get nervous about another devaluation, particularly if Chinese economic data shows no signs of picking up in the coming days.
Concerns about the economy in Europe look set to take a backseat today as we get the latest UK construction PMI data for February. Yesterday we saw manufacturing PMI slip back to its lowest levels in 34 months at 50.8, a sharp drop from January’s 52.9. While disappointing it was no more disappointing than the French and German numbers where we saw similar readings.
The construction sector has been a bright spot for the UK economy since August 2013, where it has consistently posted readings in excess of 55, with the exception of April last year. With the housing sector contributing a good part of the growth in this sector it would be disappointing if we didn’t see a decent reading here, with expectations of a reading of 55.5, up from 55 in January, which was a 9 month low.
The first week of the month is always a good insight into the US economy and yesterday’s ISM manufacturing indicator for February, while still in contraction did come in better than expected at 49.5, raising hopes that we may have seen a short term base here.
Later today we get a foretaste of the Friday US jobs report with the latest ADP employment report for February. This is expected to show a slowdown from the 205k jobs added in January, with an expectation of 185k. It should be noted though that last month’s non-farm payrolls bore no relation to the ADP number, missing massively to the downside coming in as it did at 151k.
Of more interest will be the latest Federal Reserve Beige Book, simply because it should give a broad overview of the US economy for the key Fed regions. Given that the New York President William Dudley expressed some concern about a slowing of US growth earlier this week, today’s report could offer up some important clues as to what the FOMC might do at its next rate meeting on the 16th March, and how much economic conditions have deteriorated since the last report in November.
EUR/USD – we continue to hold below the 1.0900 area and while we do so the prospect of a test towards 1.0620, trend line support from the 2000 lows at 0.8230 remains. We need to get back through the 200 day MA at 1.1050 to stabilise for a move higher.
GBP/USD – could we be seeing some signs of a base? Currently holding above 1.3800, the risk remains for a move towards the 2009 low at 1.3500, but if we get back above 1.4000 we could see a move back to 1.4090. We need to see a recovery back through 1.4090 to stabilise.
EUR/GBP – the sharp pullback from just below the 200 week MA at 0.7945 has found support at 0.7740. A break below here could well see further losses towards 0.7520.
USD/JPY – currently range bound between support at 110.00 and resistance at 114.90 we need to see a break one way or the other for clues as to the next move. With resistance at 114.80 we would need a technical break of 116.00 to argue a short term base is in place. While below 115.00 the risk is for a larger move lower to 106.00 in the longer term.
Equity market calls
FTSE 100 is expected to open 47 points higher at 6,200
DAX is expected to open 88 points higher at 9,805
CAC 40 is expected to open 46 points higher at 4,452
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