While the pound had its best day in some weeks yesterday the same cannot be said for stock markets, which continued to come under pressure.
US stock markets fell again for the eighth successive day, their longest losing run since 2008, with the S&P 500 hitting a four-month low.
With only a few more days to US polling day the closeness of the polls continues to jangle nerves in the market, with the result that the declines appear to be gaining a momentum all of their own.
This negative sentiment is also spilling over into Europe’s markets as they also slip back, as the weaker US dollar pushes up the pound and the euro, as we look again at the potential for another negative open this morning.
The pound in particular has done very well after the Bank of England performed a screeching handbrake turn on its pessimism of the last few months and upgraded its growth and inflation forecasts as well as removing its dovish bias on monetary policy to a more neutral stance. The Bank admitted it had underestimated the resilience of consumer confidence and spending in the aftermath of the referendum result, a curious admission given how many people got the result they wanted. I’m guessing economic models don’t account for the nature of human psychology.
Yesterday’s High Court verdict also helped underpin the pound by insisting that PM Theresa May had to consult Parliament on whether to trigger Article 50. While in one sense the ruling draws out the uncertainty for longer, it also means that any Brexit process is likely to be much more gradual, if it happens at all, given that the majority of MP’s have a bias to remain.
The European services sector has broadly tended to outperform the manufacturing sector in recent monthly data. Today isn’t expected to be any different with the release of the latest services PMI’s for October.
This trend is expected to continue today with improvements in Spain, Italy, France and Germany’s numbers, though this trend is likely to belie the increases seem in the headline Spanish and Italian unemployment numbers this week. Even allowing for that the fact that this week’s economic data has been fairly upbeat it’s going to make it that much more difficult for the ECB to implement further measures to ease monetary policy at its meeting in December, which some people are still expecting to see.
There was nothing in yesterday’s US data that on the face of it would prevent the Federal Reserve from pulling the trigger on a widely expected December rate rise, however there was some worrying signs of weakness in the ISM non-manufacturing numbers for October which would appear to suggest that the US services sector is starting to slow down as we head into year end.
Whether this is simply pre-election caution setting in is hard to say, but it does suggest that the US economy may not be in as strong a position come December than is currently being estimated.
We should get some extra colour on the labour market outlook later today with the latest October non-farm payrolls report which is expected to show an improvement of 175k from September’s 156k. There is a concern that this estimate may well be on the high side given the weak employment component of yesterday’s ISM non-manufacturing survey, which saw a sharp fall from 57.2 to 53.1, while the headline number also showed a similar drop from the September numbers.
The unemployment rate is expected to come down to 4.9% from 5%, while average hourly earnings are expected to remain unchanged at 2.6%. One of the Fed’s main concerns is stagnant wage growth at a time when inflation is starting to show signs of picking up, and while we do appear to be starting to see signs of rising prices, wages don’t appear to be showing signs of following suit.
Ultimately whether the numbers are good or bad is likely to matter much less than what is driving the US dollar, which isn’t interest rate expectations at the moment but what sort of outcome we get from next week’s US Presidential election.
The current uncertainty around next week’s outcome continues to drive the US dollar lower despite rising expectations of a rate move in December, now currently at 78%, with the US dollar index down five days in a row.
EUR/USD – the euro has struggled to push beyond the 1.1140 area for now, which means we could slip back towards the 1.1000 area in the short term. We have larger resistance at 1.1180 and solid support at the 1.0950 area.
GBP/USD – the pound’s rebound has brought us back to just shy of the 1.2500 area. We need to push through the flash crash gap between 1.2500 and 1.2600 to argue for further gains. Until we do there is a risk of a slide back towards the 1.2270 area in the short term. The main support still remains down at the recent lows around 1.2100. A break below the 1.2000 area has the potential to open up the previous flash crash lows at 1.1950, and possibly lower.
EUR/GBP – yesterday’s slide below the 0.8950 area saw us move down to the 0.8870 area before rebounding. A recovery back through the 0.8960 area is now needed for a return to the 0.9050 area or run the risk of a move towards 0.8780.
USD/JPY – this week’s sell off could well fall towards the 101.20 level in the short term, after dropping briefly below 102.80 yesterday. We would need to see a recovery through the 104.30 area to mitigate this risk and argue for a retest of the 105.00 area.
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