We saw another positive day for markets in yesterday with the US making more new record highs and closes, while markets in Europe also performed well, with a couple of exceptions.
Unsurprisingly Spanish markets closed lower for the second day in succession, as tensions over the weekend continued to simmer, with the Catalan government content to bide their time, ahead of a possible independence declaration.
Anyone hoping for a de-escalation might well have harboured hopes that the intervention of the Spanish King Felipe last night, might have been an opportunity to dial tensions back, after yesterday’s general strikes, and encourage dialogue between the two sides. While the monarch’s role is largely ceremonial it would have been smart politics on the part of the Rajoy government to have someone largely apolitical attempt to bridge the gap.
It was an opportunity spurned, as the King lashed out at the Catalan government without even acknowledging the casualties from the weekend events. Having miscalculated so badly with their reaction at the weekend it would appear that Spanish Prime Minister Rajoy is in no mood to compromise and looking to double down. While he is well within his rights under the terms of the law of the constitution it’s difficult to see how this can end in any other way than badly, and for that history may well judge him harshly.
Any further misjudgements by the Spanish government could well also increase the pressure on the EU to come off the fence that it has been so busy trying to stay on, with respect to last weekend’s events.
On the data front the various economies across Europe continue to tick along nicely. Earlier this week we saw the latest September manufacturing PMI’s paint a fairly decent picture of economic activity, and today’s services PMI numbers from Spain, Italy, France and Germany are expected to be equally positive. Expectations are for readings of 55.6, 55, 57.1 and 55.6 respectively.
Away from events in Spain the pound had a poor day after the latest UK construction PMI contracted for the first time since the aftermath of last year’s Brexit referendum, slipping back to 48.1 from 51.1, as new work dried up as businesses held back from making big ticket business decisions.
With the Bank of England preparing the ground for a rate rise by the end of the year a similarly weak services numbers could make the case for that a little more uncertain as we come to the end of Q3. On the retail side activity does appear to be holding up but away from that we have seen some softness from the numbers we saw at the beginning of the summer. Expectations are for an increase to 53.3 in September.
Prime Minister Theresa May will also be making her speech to the Conservative party conference today amidst a cabinet that appears divided about how to press ahead with Brexit negotiations after the EU appeared to suggest that there hadn’t been enough progress on matters such as the divorce bill, citizens’ rights and the Irish border to start trade talks later this month.
Today’s US data could also offer some important clues as to the disruption caused by last month’s storms with the latest ADP employment report for September, as well as the latest ISM services report.
We could also get some important clues as to this Friday’s US employment report, with the latest ADP report set to show a sharp slowdown to 151k, from Augusts blow out 237k number.
The services sector is also expected to show expansion of 55.5, a slight increase from 55.3 in August.
EURUSD – continues to remain under pressure and having slipped below the 1.1715 area looks set for a move towards the 1.1600 area. Only a move back above the 1.1830 area has the potential to stabilise and argue for a return to the 1.1920 area.
GBPUSD – has fallen below the 1.3340 area and looks set to push pack towards the 1.3220 area, with a break targeting the 1.3120 level.
EURGBP – continues to edge towards the 0.8900 area with support now at the 0.8820 area. A move through 0.8900 targets a move back towards the 0.8970 area. Support remains back at the recent lows at 0.8740.
USDJPY – still finding selling interest near the 113.20 level, but feels like we could extend towards 114.00. A failure here retargets the 112.20 level and below that a return towards 111.30.
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