Despite some poor economic data, particularly in respect of services PMIs from France and Germany, European markets managed to continue their rebound from Tuesday, bolstered by the prospect that further fiscal stimulus might be on its way.
One announcement in particular prompted the more positive tone, when the European Central Bank called on EU leaders to think of their Pandemic Recovery Fund as a permanent recovery vehicle, with which they could fund recovery programs in the weaker EU nations.
While this was a net positive for sentiment in Europe a more downbeat assessment of the US economy from Fed chairman Jay Powell, in the absence of new fiscal measures from the US Congress, in his latest testimony session, saw US stocks roll over into negative yesterday evening, after initially opening higher, with the Nasdaq once again helping to drive sentiment, falling in excess of 3%.
The main problem the Fed has is that US politicians appear more interested in fighting an election campaign than helping to pass a new stimulus plan which would help the American people, and this much more gloomy assessment appears to have once again undermined sentiment in what is turning out to be a very fickle investment climate.
This slide is expected to translate into a weaker start for European stocks later this morning, after Asia markets also slid lower, though increased tension between North and South Korea over the killing of a South Korean official in North Korea hasn’t helped.
The need for further fiscal action is becoming ever more apparent in some of the more recent economic data, with Germany’s economy showing particularly bi-polar characteristics. The latest manufacturing flash PMI for September showed a sector in fairly buoyant mood with a reading of 56.6, up from 52.2, however the services sector sunk into contraction territory over increasing concern as to the effect rising infections rates will have on consumer spending in general.
It is a similar story in France, which also saw services activity slide even further in September, slipping into contraction territory, of 47.5, from 57.3, only two months ago. The rising infection rates and localised restrictions cutting the legs out of the French rebound story before it had even achieved escape velocity.
Today’s latest German IFO survey for September is likely to reinforce the disconnect in the German economy, more so now given recent changes to how it is calculated. Now the business climate survey includes a much bigger proportion of the services sector, which means that the slowdown seen in the recent PMIs should also be reflected in the latest survey.
Given recent events a lot of German businesses are likely to be increasingly concerned over the prospect of a second wave, which might mean it could struggle to get back to the levels we were seeing at the end of last year, and the beginning of this year of the mid to high 90’s. Expectations are for an improvement to 93.8 from 92.6, though this could well also be wishful thinking if the PMIs are any guide.
While the German government has pledged to continue its fiscal plans to support the German labour market until the end of 2021, German businesses may well hold back from large scale investment in their longer-term plans if long term indications about a continued recovery start to falter
The pound had a predominantly better day yesterday, helped by a strong end to Q3, with decent performances from the services and the manufacturing sector, as the September flash PMIs held up well from their lofty August numbers, coming in at 54.4, and 55.1 respectively.
The latest CBI retail sales numbers, due later this morning is expected to show a slowdown in September, from -6 to -10.
More importantly in light of this week’s announcement from the Prime Minister, of the new restrictions being imposed on the hospitality sector, calls are growing for the extension of the existing furlough scheme, or a new plan to help businesses that are on the brink as a result of this new measures.
Yesterday chancellor Rishi Sunak announced that the Budget that was expected to take place next month has been cancelled, as he and the Treasury look to embark on a new plan of measures, that will allow the businesses most affected by the virus, to keep working.
It now seems likely that he will finish the furlough scheme, however it is more than likely to be replaced by another type of plan, more suited to the requirements of smaller and more medium sized businesses, as we gear up for a long hard haul toward March 2021.
Details of the shape and scope of this new support scheme are expected to be announced later today, with speculation about wage subsidies and targeted aid on the more exposed sectors, in order to keep these businesses on life support, until some sort of normalisation.
With Bank of England governor Andrew Bailey also due to speak again later today, it could well be another choppy day for the pound, with the concern about negative rates still fresh in the market's memory.
EURUSD – has continued to drift lower with a test of the 1.1530 area the next target initially. The 50-day MA at 1.1780 is now expected to act as resistance for this move.
GBPUSD – drifted down to 1.2675 yesterday and looks set for further losses towards the 1.2500 area. We need to regain a foothold back above 1.2780 to open up the prospect of a return to the 1.2870 highs of Monday.
EURGBP – while the 0.9220 area continues to cap the risk is of a move back to the 0.9130 area and then lower towards 0.9080.
USDJPY – has continued to push on from the 104.00 area and looks to be set for a return to the 106.20 area, now we’re above the 105.20/30 area.