China turmoil relegates US payrolls to a footnote
19:00, 07 January 2016
· By CMC Markets
It takes quite something to relegate the US employment report to a footnote in this week’s trading activity, but the China induced volatility seen over the past few days appears to have done the trick, with interest. As we come to the end of the week European equity markets look on course to post some of the worst weekly losses since the previous China induced volatility, seen last August.
The decision by Chinese authorities to suspend its circuit breakers on their stock market late yesterday did initially see European stocks pull back from their lowest levels of the day, but they do appear to have steadied some nerves in a choppy Asia trading day. Nonetheless there removal may have done little in the short term to assuage concerns of more continued stock market volatility in the days and weeks ahead.
In reality Chinese authorities had little choice in the face of further volatility induced shortened trading days, quite simply a 7% circuit breaker on a market that can swing as much as that in a single day was always doomed to fail.
The bigger question now is whether Chinese authorities can restore some vestige of credibility over the coming days and weeks in the face of a currency that still remains broadly overvalued on a trade weighted basis, and is likely to continue to go lower, in the process placing further downward pressure on global inflation and commodity prices.
As we come to the end of an incredible first week of trading in 2016 attention will now shift towards this afternoon’s US December employment report, which to some extent probably no longer carries the importance that was attached to it throughout 2015, now that we’ve got that first rate hike out of the way.
That’s not to say that it’s no longer relevant, it is, but the focus now has shifted towards the pace of inflation, and wage growth or the lack thereof, along with speculation as to how many further rate rises could be in the pipeline further down the track, at a time when inflationary pressures remain muted.
In the wake of Wednesday’s better than expected ADP report of 257k expectations of a good number have increased ever so slightly, with numbers in the region of 200k being touted. It would be dangerous to seek to draw too much of a correlation though, given the much weaker than expected December manufacturing PMI and ISM surveys of the last week or so, which along with the effects of a stronger US dollar, could well see the numbers disappoint.
The unemployment rate is expected to come in at 5%, while the participation rate is set to remain at multi decade lows of 62.5%, while average hourly earnings on an annualised basis are expected to show an increase of 2.6%, up from 2.3% in November.
EURUSD – yesterday’s rebound has taken us back through 1.0820 and as such leaves open the prospect of a move to 1.0950. Only a move back below 1.0800 argues for a retest towards the 1.0600 level where we have trend line support from the all-time lows posted in October 2000 at 0.8220. A break below 1.0600 could see a return to 1.0465 and last year’s low.
GBPUSD – despite posting a marginal new 5 year low the pound has rebounded back above 1.4565, and remains vulnerable to a rebound towards 1.4820. A consolidated move through 1.4550 argues for a retest of the 2010 lows at 1.4230. We need to see a rebound back through the 1.4820 area to stabilise.
EURGBP – having blown through resistance at 0.7410 the euro looks set for a retest of the October highs at 0.7495. Support now comes in at the 0.7410 area with a break below arguing for a return to the 0.7280 area. A move through 0.7500 argues for a move towards 0.7600.
USDJPY – having broken below the 118.10 area we could well see a return to the August lows down near the 116.00 area. We need to see a move back through the 118.30 area to stabilise a risk a move back towards the 120.00 area.
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