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Europe to open higher after late US rebound

Having seen US markets tumble sharply in the past few weeks you’d be forgiven for thinking that the US economy was on the brink of slowing down quite sharply. This might be something to worry about if the data supported that assertion, but on the evidence so far, the facts don’t support that line of reasoning, at least not yet anyway.

There are pockets of concern if you look carefully, but for the moment this week’s ISM surveys show a US economy that is still performing quite well. On the headline numbers for November the economy improved from October, however there were signs of slowing inflation in manufacturing, as well as a drop in the employment component of the non-manufacturing surveys.

Yesterday’s sharp declines were largely put down to concerns as to what was agreed between the US and China in Buenos Aires at the weekend, while the arrest of the Meng Wanzhou CFO of Chinese telecoms company Huawei raised concerns that the fragile truce agreed at the weekend might delay or derail the progress made at the G20.

The only problem with this line of reasoning is that Meng Wanzhou was already in custody on the Saturday prior to the statements being released about the various accords. While it is plausible that President Trump may not have been aware of the arrest, something that his National Security Advisor John Bolton suggested was the case, you can be almost certain that Chinese officials were aware, so while it may seem plausible to use the arrest as an additional catalyst for yesterday’s sell off, it doesn’t stand up to scrutiny. There is also the fact that there have been plenty of instances in the past, using ZTE as an example where Chinese companies have fallen foul of US regulators and there hasn’t been anywhere near the type of negative reaction that we saw yesterday.

As it is US markets having been down nearly 3% at one point yesterday, snapped back sharply into the close on reports that the US Federal Reserve might look at slowing the pace of their rate hiking cycle, after December, with the Nasdaq actually finishing the day in positive territory.

European markets have had a dreadful week with the FTSE100 having its worst day since the Brexit referendum, while the DAX fell into a bear market, over 20% down from its record highs of earlier this year.

One of the main reasons for the sharp fall in the FTSE100 was another weak session for oil prices which dragged on the oil majors, after OPEC procrastinated about how much to cut production in response to the recent slide in oil prices. We could well get a decision later today, however the consensus appears to be a cut of 1m barrels which may not be enough. Sliding yields also weighed on the banking sector, as concerns about an inverting US yield curve raised concerns about future bank profit margins. 

On the bright side, yesterday’s sharp US rebound off the lows should get the European session today off to a positive start, as investors look towards today’s US payrolls report.

Yesterday’s ADP payrolls report for November was a little bit of a disappointment, falling short of expectations, dropping back from October’s 225k, coming in at 179k.

We can probably expect to see a similar slowdown in the non-farm payrolls number after the bumper 250k seen in October, with a number in the region of 200k, however we shouldn’t rule out a pre-Thanksgiving boost as retailers hire hundreds of extra staff to cope with the upcoming holiday season, so it wouldn’t be a surprise to see a number well above 200k.

In any case it’s not really been about the headline numbers in recent months, and it’s unlikely to materially affect the outcome of this month’s Federal Reserve rate meeting.

What is encouraging is the recent acceleration in wages growth, last month earnings hit their highest levels in a decade at 3.1%, in October, and this trend is expected to be maintained in November, remaining steady at 3.1%.

It’s also Canadian jobs day in the wake of this week’s Bank of Canada decision to hold rates steady. While the decision to hold wasn’t a surprise the tone of the guidance was, suggesting that inflation was likely to remain subdued, which would appear to suggest that a January hike wasn’t being considered, whatever the Fed does later this month.

The decline in oil prices no doubt played a part in that while today’s jobs figures are expected to show 10k new jobs added in November, a slight decrease on the 11.2k in October. More concerning continues to be the lacklustre pace of wages growth which is expected to slip to 1.8%. 

EURUSD – we continue to find support above the 1.1280/1.1300 area but still lack overall direction. The 1.1500 area remains the main resistance to the upside, with 1.1420 also minor resistance. 

GBPUSD – continues to hold above the 1.2650 area which 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 the upside, and while below the bias remains for a return to the 0.8870 area. 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 – yesterday’s move down to the 112.20 area has the potential to unlock further losses, while below the 113.20 area. A move through 112.20 opens up a move towards 111.80, which in turn could open up a move towards 110.00.

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