Having been on the receiving end of a lousy hand off from US markets on Tuesday, equity markets in Asia and Europe both fell heavily yesterday, and with US markets out due to the funeral of former President George HW Bush, there was no catalyst to help underpin any form of buying interest, with the DAX closing at a one week low.
Investors appeared to be disregarding the noises finally coming from Chinese officials that confirmed the 90-day trade war truce agreed at the weekend, as well as reports that they would start making preparations on some of the items discussed at the weekend G20 meeting.
Reports that officials had started taking steps to restart US imports of soybeans and liquefied natural gas were also the first signs that for all of the talk from US officials, there might well have been something tangible agreed at the weekend meeting between President’s Xi and Trump.
Whether this would have been enough to calm investor nerves, when US markets returned later today is a rather moot point now given the arrest overnight by Canadian authorities of the CFO of Chinese telecoms company Huawei, in the wake of an extradition request by the US.
The arrest comes against a backdrop of concerns about trade and technology as well as cyber security when using Chinese hardware for IT systems. ZTE another Chinese firm has already been sanctioned by US authorities so for Huawei to be dragged in as well comes at a bad time when tensions between China and the US over trade at such a delicate stage, and could derail whatever was agreed at the weekend between President’s XI and Trump.
Asia markets haven’t reacted well selling off sharply and this is expected to hand over to European markets this morning with more heavy falls and wrestles the attention back from the shift in focus towards the slide in bond yields, which seemed to be a little overdone when considering how little has changed from a week ago.
Concerns about a possible recession and an inverting yield curve do appear a little premature when looking at how the US economy is performing, something which today’s ADP employment report and services ISM survey for November should reinforce.
We’ve already seen some decent manufacturing reports in the past few days and with Thanksgiving and Black Friday last month, hiring is likely to have been robust. The ADP report is expected to see 200k new jobs added, slightly down from October’s 227k, while the non-manufacturing ISM is expected to come in at 59.2, slightly down from 60.3.
The slide in oil prices has certainly shifted the debate on price inflation, given recent declines. It was less than two months ago that speculation was rife on the risk of a move towards $100, and now here we are just above $60, having slid over 30% from the October peaks.
Against this slide in oil prices and President Trump’s constant tweeting about wanting lower oil prices, it seems unlikely that OPEC and/or Russia won’t make some sort of cut to output if only to help put a floor under prices in the short term, and pull prices back towards $65 a barrel level. Last month Saudi output hit a record of 11.3m barrels in response to requests from the US President to help offset the loss of Iranian crude, while US inventories have been rising consistently every week for over two months.
The decision by Canadian producers in Alberta to cut output earlier this week by 325k barrels a day was a direct response to the prospect of running out of storage capacity. A failure to act by OPEC and Russia could well see prices roll over again, though we could get some sort of fudge with a commitment to cut at the beginning of next year.
The pound managed to regain some ground yesterday despite the highly probable likelihood that Prime Minister Theresa May’s Brexit withdrawal agreement could well get voted down next week. Recent events in the last couple of days appear to have shifted the calculus around the prospect of a “no deal” Brexit to either a form of soft Brexit or a remain outcome, though how we get there is anyone’s guess.
On the data front the pound shrugged off a hugely disappointing services PMI number for November, coming in at 50.4, posting its worst monthly performance since July 2016, though there were some bright spots with employment still growing, and new orders still in positive territory, albeit on the weak side. While some have suggested that this is down to Brexit related uncertainty, eurozone PMI’s were also weak as well.
EURUSD – has thus far failed to move beyond the 1.1500 area and this continues to cap the upside. While below here we could see a retest of the 1.1280 level in the short term, with the potential to revisit the lows earlier in November.
GBPUSD – struggling for direction but with a downward bias the 1.2650 area seems to be acting as a decent support for now. The pound continues to remain vulnerable and a conclusive move below 1.2600 could be the catalyst for a move towards the 1.2000 level and 2017 lows. We need a move back above 1.2840 to stabilise.
EURGBP – the 0.8935/40 level continues to cap advances for now. Found support at 0.8870 yesterday, we remain in a range with stronger support at the 0.8820 area. Above the 0.8940 area argues for a move towards the August highs at 0.9100. Still in the broad range, with support also at 0.8740.
USDJPY – finding support at the 112.50 area the last two days, but we need to overcome the 114.00 area to see further gains. While below 114.00 the risk remains for a move below the 112.50 level and towards 111.80 The bearish weekly reversal of two weeks ago remains valid while below 114.20.