European markets look set to open sharply lower this morning, continuing their recent weakness after last night’s plunge on US markets saw recent losses start to feed in on themselves, after investors were caught off guard by a much weaker than expected ISM manufacturing report for January.
Throw in some concern about the impending deadline for the raising of the debt ceiling in light of US Treasury Secretary Jack Lew’s comments yesterday and uncertainty appears to be the prevailing sentiment of the moment.
There is certainly an argument for thinking that the recent cold weather in the US may well have affected yesterday’s numbers, and while this recent data weakness is worrying it’s also not altogether surprising.
The biggest concern could be if these numbers mark the beginning of a lower rate of trend growth for the US economy, which would spell trouble for valuations given recent complacency in the recent run up in stock markets, but for now it’s probably too early to tell.
In any case investors don’t appear in any mood to wait to find out, and what we saw last night was a possible tempering of expectations for this week’s ADP and non-farm payrolls numbers, rather than waiting to decide whether the current weakness is seasonal, as a result of the bad weather, or whether it’s a harbinger of further weakness to come.
As stocks sold off US treasuries continued to build on the gains of last month pushing back to levels last seen in November as 10 year yields fell to their lowest levels since 1st November last year at around 2.56%, as capital flowed out of emerging markets and back into US government bond markets.
As stock markets plunge around the world the slight improvement being seen in some of Europe’s economic data is being completely overshadowed, and this uncertainty in emerging markets could well manifest itself by setting back the recent European recovery.
We’ve seen some improvement in recent economic data out of Spain and in December we saw a rather unusually big drop in the unemployment data for December, which elicited a great deal of scepticism as to its accuracy with a 107k drop. Today’s Spanish unemployment data for January should give us some indication as to whether it was a quirk or whether it was the beginning of a potential turnaround. Expectations are for a fall of 21.3k.In the UK the pound slid sharply yesterday despite a fairly good manufacturing PMI number for January, coming in at 56.7, slightly below expectations. This miss on the headline rate appears to have spooked some selling; however it seems to ignore a continued improvement in the new orders which grew at their highest levels in three years, while the employment component rose for the ninth month in a row.
Today’s January construction PMI is also expected to come in a little weaker from the December number of 62.1 at 61.6.
EURUSD – the euro seems to have found a short term base at 1.3475/80, however the onus remains firmly towards the downside and a move towards 1.3300 the level, with fairly strong resistance now sitting around the 1.3700 area. Last month’s bearish engulfing candle on the monthly charts suggests the bias has now shifted towards the downside, and a subsequent retest of the 1.3000 level.
Long term trend line resistance remains at 1.3865 from the all-time highs at 1.6040 and ultimately this remains the key obstacle to a move through 1.4000.
GBPUSD – we’ve got our move to 1.6300 and we could well decline further towards the 1.6000 level on a break below 1.6250. Resistance now comes in at 1.6420 and the 50 day MA, but in order to stabilise we need to get back above 1.6510 argue for a retest of last month’s high.
EURGBP – yesterday’s rebound has brought us back to the 0.8300 level and could well see further gains towards 0.8380, trend line resistance from last August highs. To do that we need to break through the 50 day MA first or risk a return to yesterday’s lows.
USDJPY – yesterday’s break below the 101.80 level has taken us through 101 and could well see further losses towards 100 and the 200 day MA as well as the 61.8% Fibonacci retracement of the 96.55/105.50 up move. We could well see further losses now, given the US dollar has posted its worst month since April 2012, and a bearish engulfing month. This would suggest we’ve seen the highs in the short term, and could be set for move towards 100.00 and 95.00. We need to see a move beyond 101.80 to suggest a move back towards 103.80.
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