In the absence of the US, markets in Europe underwent a rather subdued and mixed session yesterday, with the DAX coming under pressure on the back of a weak performance from the auto sector as investors waited for the next development in the US’s negotiation stance when it comes to future trading relations with the EU and China.
The FTSE 100 fared slightly better on the back of a weaker pound and a strong performance from banks and the oil and gas sector.
The pound’s difficult day came about as result of EU chief negotiator Michel Barnier’s comments that he was opposed to a lot of Prime Minister May’s Brexit plan. Putting to one side that he’s not the only one, this wasn’t a particularly surprising revelation given that the plan has been as dead as the proverbial dodo for some time now, with both sides of the Brexit divide also opposed to it, as politicians in Westminster returned from their summer holidays.
In any case Barnier’s intervention set the initial tone for the week, given its contrast to last week’s more positive tone that a bespoke deal could be done on trade.
A disappointing manufacturing PMI number for August didn’t help, as economic activity came in at a 25-month low of 52.8, with the summer holiday doldrums appearing to weigh on output. New export orders in particular were disappointing, despite the recent weaker pound, though some of this may well be down to weaker global economic activity, rather than the go-to excuse which tends to be Brexit uncertainty.
Today’s construction PMI number for August is also likely to soften slightly with some summer holiday weakness expected. A modest fall from the big jump to 55.8 we saw in July is expected to 54.9, though we might see a larger fall, particularly if the school holidays prompt a pause in some longer-term projects.
The main focus today is likely to be on the latest meeting of the Treasury Select Committee in the wake of last month’s Bank of England rate hike and inflation report.
Under normal circumstances attention would be on the monetary policy committee’s reasoning behind their decision to raise interest rates last month at a time when Brexit uncertainty is quite likely to increase.
Unfortunately, most attention is likely to be centred on speculation around the prospect of whether Mark Carney will extend his tenure as Bank of England governor beyond the summer of next year.
Having already gone through this process once already a year ago it seems that we are set to go through it all over again as the two-way speculation continues as to whether Mr Carney will stay for another year, or go in 2019 as he originally indicated.
This procrastination around one of the UK’s most important policy appointments is not only unwelcome, it sadly appears to be indicative of Mr Carney’s stewardship of the central bank where flip flopping around forward guidance earned the governor the title of the “unreliable boyfriend”.
Now, as with monetary policy, we appear to be going down the same road with respect to the leadership of the central bank, at a time when more than anything the UK needs certainty, about who will be overseeing monetary policy into the next decade.
Hopefully MP’s will pin down the Bank of England governor on his future, as well as any succession plan. The current speculation is not only unwelcome, but it also comes across as incredibly self-indulgent at a time when investors and financial markets want to feel certain that in the absence of political leadership, we still have a safe pair of hands at the Bank of England. Carney’s apparent equivocation is not particularly helpful at a time, especially as any new appointment process should be well underway by now, in order that markets get a clear idea as to who might be taking over.
US markets are also set to return from the Labour Day long weekend after a decent August performance, having to digest the possibility that a NAFTA deal may well be further away than it was at the end of last week.
Weekend comments from President Trump would appear to give the impression that he’s not particularly interested in arriving at a deal with Canada. This raises the prospect that the optimism that helped drive last week’s gains could well start to disappear in the same way that concerns about trade has weighed on European and Asia markets in the past few weeks.
EURUSD – the 1.1750 level once again proved to be a significant barrier to further gains last week, as the euro drifted back from levels that have capped since early July. This failure could well see a move back towards the 1.1500 area, now that we’ve slipped below the 1.1620 area.
GBPUSD – last week’s rebound saw a decline away from the 50-day MA at 1.3045. This move has brought us back to the 1.2850 level which has held for now. Below 1.2850 retargets the 1.2770 area. We need a move back above 1.2930 to retarget the 1.3070 area.
EURGBP – having hit a one-year peak last week, just shy of 0.9100, we’ve seen a sharp pullback with a key reversal day and a key reversal week, which suggests the potential for further losses towards 0.8920 and the July lows at 0.8860/70, while below the 0.9040 area.
USDJPY – fell just shy of the 112.00 area last week keeping the US dollar in a range. A move lower has support at the 110.60 cloud support area. The major support sits back on the 200-day MA at 109.80.
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