European markets slid back for the third day in a row yesterday, although the losses were more modest than the big falls seen on Monday.
With European gas prices continuing to trade at record highs, investor anxiety is growing that a combination of central banks raising rates and higher energy prices will tip the global economy into a long recession.
Yesterday we saw further evidence of the damage that high energy prices, supply chain disruptions and the risk of rising interest rates are doing to economic sentiment across Europe, as well as the US, after the latest flash manufacturing PMI showed that recession is looming in Germany, France, and the UK.
On the other side of the Atlantic, while the picture is believed to be better, we are also getting increasing signs of economic stress. After slipping into contraction territory in July, services sector activity in August slid even further, sliding to a 2-year low, while new home sales fell sharply by -12.1%, to a 6-year low.
With European markets finishing lower, US markets also struggled to make headway, closing lower for the third day in succession. Markets in Asia also came under pressure as more covid lockdowns in China, this time in a city just outside Beijing reinforced the feeling that there was unlikely to be any recovery in China this side of next year. Consequently, today’s European open looks set to be a negative one.
Crude oil prices finished the day sharply higher, despite concerns over weak demand, boosted by comments from the Saudi Arabian oil minister that they might look at cutting output because of concerns about the recent sharp drop in prices.
Even with the current economic backdrop, worries about low prices seem a little overblown, given low inventory levels, which makes the Saudi Arabia comments a little puzzling. There has been the backdrop of a possible Iran nuclear deal, but that remains an outlier.
The US dollar also slipped back on profit taking after running higher for three days in a row, having hit a new 20 year high against the euro, with the unexpected weakness in US economic data prompting a modest pullback.
Today looks set to be a quiet day economic data wise with US durable goods orders and pending home sales for July, as we look ahead to the start of tomorrow’s Jackson Hole Symposium.
EUR/USD – slipped to a fresh 20 year low, at the 0.9900 level before rebounding back above parity. The bias remains towards the 0.9620 area, while below the 1.0220 area which is minor resistance on any pullback, followed by major trend line resistance from the January highs at 1.0340.
GBP/USD – rebounded from the 1.1718 area before rebounding to 1.1875. Bias remains to the downside towards the lockdown lows of March 2020 at 1.1500. Resistance comes in at 1.1980 area.
EUR/GBP – with resistance at the 0.8510 area, and the 50-day MA, we have support coming in around the 0.8410 area. Below the 0.8400 area targets 0.8370.
USD/JPY – pulled back from the 137.70 level, slipping back to the 135.80 area, just shy of the 50-day MA at 135.50. This is now a key support area, which while it holds should keep the prospect of a move towards the 139.40 area and previous highs.