European markets underwent a subdued session yesterday, undermined by events in Hong Kong after violence there escalated sharply, while profit taking in the US in the wake of the records of last week saw stocks close lower ahead of some key speeches later today from President Trump on trade, as well as testimony from Fed chairman Jay Powell to US policymakers on Capitol Hill.
The main reason for the pause we’ve seen in the last 48 hours is a result of the conflicting signals being given by the Chinese Ministry of Commerce, and President Trump on whether we can expect to see the delay or rollback of tariffs in any phase one deal that is agreed in the coming weeks.
The pound also had a decent day after Brexit Party leader Nigel Farage pledged not to stand candidates in seats that the Conservatives won in 2017, as markets surmised that in doing this the risk of a split vote and hung parliament would be reduced.
While that may be true it may not make much of a difference on the fringes, with the outcome of next month’s vote still too tough to call with any degree of certainty.
On the data front yesterday, it was good news for the Conservatives as the UK managed to easily avoid a recession in Q3, with the economy expanding by 0.3%, with the services sector helping drive all of the expansion. Exports also rebounded quite nicely, even if imports were a little more subdued, however annualised GDP was a mere 1%, the weakest annual expansion since the first quarter of 2010. Over the last six months the economy has struggled to grow at all, despite unemployment remaining at a 40-year low and wages rising steadily.
This week will be a key battleground for the political parties with any data weakness likely to be seized upon by the opposition that the UK economy is set to slow even further, while fairly decent numbers will be used to portray the current incumbents as safe stewards of the economy over the next five years.
Last month the unemployment rate did tick higher from 3.8% to 3.9% with some concern that it might be well have bottomed out and start to edge higher again, after months of slowly declining. The surprise has been that with all the job losses that have been a feature of this year in retail this hasn’t happened sooner, however it would appear that the UK labour market is more resilient than thought.
Against this backdrop it’s easy to forget that wages have been rising at near to 4% on a rolling three-month basis, while unemployment has remained down near 40-year lows. At a time when the debate over Brexit has poisoned the political discourse, this has been a welcome relief to hard pressed consumers, at a time when inflation has seen falls to below the Bank of England target rate. In terms of real incomes that has been a very positive story to tell.
This morning’s unemployment and wages numbers for the three months to September are expected to remain steady, with unemployment steady at 3.9%, with wages set to come in at 3.8%.
While the UK economy only grew at 1% on an annualised basis, Germany’s economy is also struggling with an annualised rate of growth expected to come in lower later this week at 0.8%.
Today’s latest German ZEW survey has started to show some signs of improvement in recent months, after hitting a low of -44.1 in the middle of the summer, at around the time the German DAX hit an eight-month low. Since then we’ve seen a gradual improvement in both, however it is clear the DAX has outperformed the recovery in the ZEW. We are expected to see another improvement in sentiment; however, we are still expected to stay in negative territory, moving from -22.8 to -13.2.
This lack of confidence in investor expectations would suggest that investors are far from convinced in the sustainability of the recent rebound, despite some minor improvements in the economic data.
EURUSD – found some support just above the 1.1010 area, however while below 1.1100 the risk remains for a move towards the 1.0980 level, with a break opening up a return to the October lows of 1.0880. Broader resistance can be found at the 1.1180 area and 200-day MA.
GBPUSD – pulled sharply off the 1.2760 area however we need to push back above the 1.2980 area to sustain a move higher. The inability to sustain gains above the 1.3000 area is a problem in the short term. The 200-day MA at 1.2680 is a big support level and while above it the scenario remains bullish for 1.3200.
EURGBP – pushed briefly below the 0.8570 area yesterday, in what could be the first indication we could head lower. Resistance remains near the 0.8670 area. A sustained break below the 0.8570 level has the potential to open up a move towards the 0.8410 area and the lows this year.
USDJPY – edged beyond the 200-day MA and the 109.20/30 area last week but could run into resistance at the 109.80 area, though the bigger level is likely to be found at the 110.20 area. This is trend line resistance from the 2018 highs at 114.75. Support can be found near the 108.70/80 area.
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