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Stocks slide post China manufacturing report

2018 was a tough year for stocks. 

The year started out strong, but ended very much weak. The FTSE 100 lost over 12%, and it had its worst year since the credit crisis, and the DAX was in a similar position as it registered its worst year in a decade. The Dow Jones and the S&P 500 both finished in the red for the first time in three years. Worries about global growth, trade tensions and the possibility of higher interest rates from the Federal Reserve weighed on stock market sentiment.  

Overnight, the Caixin survey of Chinese manufacturing came in at 49.7, while economists were expecting 50.1. The November reading was 50.2. The Chinese economy has been cooling recently and the figure overnight confirms the economic slowdown. A reading below 50.0 indicates a contraction, and today’s report was the first contraction in 19 months. Asian stocks sold-off heavily overnight on the back of the disappointing update out of China.

Gold has enjoyed a positive run recently as the dip in the greenback lifted the metal. Recently gold hit its highest level in over six months, and that is largely due to the softness in the US dollar, and the uncertainty in worldwide equity markets has played a small role too.

The US dollar index has been in a downward trend since mid-December and the change in perception about the Federal Reserve is fuelling the slide in the greenback, and the political stalemate in Washington DC isn’t helping either.

The partial shutdown of the US government continues as President Trump and the Democrats are locked in a battle over the funding for the wall along the Mexican border. Some confidence in the US economy has been eroded on the back of the political fight, but investors are mainly concerned about the lack of clarity, and even though the Democrats are hoping to put a plan together, the gulf between the two sides is wide.

The UK parliament is set to vote on Theresa May’s Brexit deal this month, and Prime Minister May called for MPs to back her proposal in her New Year message.

The oil market had a dreadful 2018, as WTI dropped almost 25%, while Brent Crude fall nearly 20%. In December, OPEC and partners announced plans to cut oil production in 2019, but that wasn’t enough to prop-up the energy market, as traders were afraid of a slowing global economy and rising inventories in the US.  

Later today we have a raft of manufacturing data released. Italy, France, Germany and the UK will all announce their reports this morning, and the consensus estimate is 48.4, 49.7, 51.5 and 52.6 respectively. The eurozone has been producing some poor economic indicators recently, in particular Italy and France. Investors are concerned the currency bloc is going through an economic malaise.

At 3pm (UK time) the US will release the ISM manufacturing and the consensus estimate is 57.9      

EUR/USD – has been diving lower since late September and if it holds below the 1.1510/00 region, it could pave the way for the 1.1215 area to be retested. A move to the upside could run into resistance in the 1.1510/00 area.

GBP/USD – bullish engulfing might see a move back towards the 1.3000 region. Another move lower might bring 1.2476 into play. 

EUR/GBP – the bearish engulfing might drive the market to the 200-day moving average at 0.8849. If the wider rally continues, it might target 0.9100.

USD/JPY – has been edging lower since October and if the negative move continues, support might be found at 109.19. If a wider uptrend continues, it might run into resistance at 113.70.

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