European and US equity markets finished lower yesterday as political uncertainty and worries about the state of global trading relations hit sentiment.
The concerns about a no-deal Brexit or a general election hung over the UK market, and to an extent it soured sentiment in mainland Europe too.
It was the first day of the trading week for the US as the country cerebrated Labour Day on Monday, and it was also the first day back with the latest round of tariffs in the US-China trade spat. China’s vice Premier, Liu He, said he hopes Beijing and Washington DC can find common ground. President Trump claimed the trade talks with China are going ‘very well’, but neither comments cut any mustard with traders. Actions speak lounder than words, and the reality is that tariffs have gone up, and the plan is for them to keep going up.
Last night MPs voted in favour of trying to prevent a no-deal Brexit, and in response, Prime Minister Johnson said he would press for a general election – a reaction that didn’t spook the markets. Opinion polls put Mr Johnson’s Tory party in the lead, but as Theresa May found out in 2017, polls can’t always be trusted.
The slowdown in manufacturing in China and Europe can be felt in the US, as the ISM manufacturing update slipped to 49.1 – the lowest reading since early 2016. This adds to the view that global manufacturing is in a recession, and that is adding to the view the world economy is slowing.
Overnight, the Caixin survey of Chinese services were released, and the reading was 52.1, and economists were expecting 51.7, and the previous reading was 51.6. Keep in mind the Caixin survey of Chinese manufacturing showed a swing to growth during the week.
Sterling had an eventful day yesterday due political woes. The pound fell to a level against the US dollar that was last seen in the 1980s. Worries of a general election or a no-deal Brexit hit the pound, but sterling began to pullback from its overstretched position, and the cooling of the dollar on the back of the ISM update, caused GBP/USD to turn positive. The UK construction PMI report for August was 45, which undershot the 45.9 forecast. The reading was poor, but it had little impact on the pound.
Oil tumbled yesterday, especially WTI, as traders are fearful the Chinese levies on US oil will dent demand. Global trade tensions and the poor US ISM manufacturing report weighed on the energy market. To make matters worse, OPEC increased output in August, and it was the first increase this year.
Between 8.15am and 8.55am (UK time) Spain, Italy, France and Germany will release their services PMI reports, and dealers are expecting 53, 51.6, 53.3, and 54.4 respectively. These figures might give us an indication of what the ECB will do next week as there is speculation the central bank will loosen policy.
Sterling has been under enormous pressure recently, and dealers will be paying close attention to the UK services PMI report which will be released at 9.30am (UK time). The reading is tipped to be 51. The Bank of England inflation report hearing will begin at 2.15pm (UK time), and it might add volatility to the pound.
Eurozone retail sales will be announced at 10am (UK time), and traders are expecting a 0.6% drop on a monthly basis. At 1.30pm (UK time), the US trade balance will announced, and the consensus estimate is for a deficit of $53.5 billion.
The Bank of Canada (BoC) is tipped to keep rates on hold at 1.75%, and the announcement will be made at 3pm (UK time). Last week we saw impressive GDP figures from Canada where the economy grew by 3.7% on a quarterly annualised basis. There is chatter the ECB and the Fed will loosen their monetary policy this month, so the BoC might use dovish language in order to keep up with the global trend of lower interest rates.
EUR/USD – remains in the wider down trend of 2019, and if the bearish moves continues it might target the 1.0900 area. A move back through 1.1000, might pave the way for 1.1164 to be retested.
GBP/USD – yesterday’s daily candle has the potential to be a hammer, and a break above the 1.2200 area might bring 1.2309 into play. Support might be found at 1.1900, should the wider bearish move continue.
EUR/GBP – the weekly candle last from mid-August appears to be a bearish reversal, and if the downward move continues it might target 0.9000. A rebound in the currency pair might bring 0.9200 into play.
USD/JPY – rebounded last week, and a break above the 107.00 area, might bring 108.47 (100-day moving average) into play. Should the wider downtrend continue it might retest the 104.50 area.
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