Another day of strong gains in metals prices along with a recovering US dollar and diminishing concerns over geopolitical risks served to combine to return a day of strong gains for both European and US equity markets yesterday, with the Dow posting its best one day gain since April on chatter that the Trump administration might be able to make some progress on the thorny issue of tax reform.
Sadly we’ve seen this movie quite a few times this year with the hope that US politicians may well be poised to move forward with a program of tax reform, and for those hopes to subsequently turn to dust.
The focus today ahead of this week’s Jackson Hole symposium will be the latest flash PMI’s for August from Germany and France, as well as a speech by ECB President Mario Draghi in Germany, at 8am BST this morning, with investors looking for clues as to his thinking about what the European Central Bank might do with respect to the current bond buying program, as we head into year end.
It was only a month ago that the head of the German IFO reported that business confidence had hit record highs in Europe’s largest economy with sentiment amongst German businesses at euphoric levels. This in itself should have acted as a warning sign given that euphoria as an emotion tends to dissipate quite quickly and subsequently be followed by either melancholy or depression.
This appears to be what German investors are experiencing if yesterday’s ZEW economic expectations is any guide, after it hit its lowest level this year, and a 10 month low.
The reality is that the truth is likely to be somewhere in between and today’s latest German flash PMI data along with this Friday’s IFO should give some clues as to whether investor concern with respect to German economic expectations is one that is shared by German businesses.
The fact is that investor confidence has been declining steadily since May, which is roughly around the same time that the German DAX topped out and started its steady decline to the three month lows we saw last week, and these two do have a tendency to correlate quite closely.
It could be that the growing scandal surrounding the German auto sector has the potential to make German businesses a little bit nervous given how many jobs rely on this powerful part of the German economy, which means this Friday’s IFO reading could be quite instructive.
Before that though we get the latest flash manufacturing and services PMI numbers for August which, after a strong few months do appear to be starting to show signs of plateauing. Expectations are for a modest decline from 58.1 to 57.7 in manufacturing, while services, which have been underperforming expected to pick up from 53.1 to 53.4.
The numbers from France are also expected to decline modestly with manufacturing slipping back to 54.5 from 54.9 and services to come in at 55.9, down from 56.0.
The pound has continued to be the whipping boy of the currency markets despite the fact that recent economic data has remained constructive. Yesterday’s public sector borrowing numbers continued the recent theme of positive data with a surplus in July for the first time in fifteen years, boosted by higher tax receipts, while the latest CBI industrial orders for August built on the strong performance in July, with the lower pound continuing to act as a tailwind for the sector.
EURUSD – despite pushing above the 1.1800 area the failure to climb above the 1.1850 area, has seen a slide back lower. The main support remains back down near the 1.1680 area for now, and below that at 1.1620.
GBPUSD – continues to find it difficult to move beyond the 1.2940 area running the risk of a move down towards the 1.2810 area and even the 200 day MA at 1.2600. We need to move above the 1.2940 area to retarget the 1.3040 level.
EURGBP – no sign of a pullback thus far as we continue to edge higher as we look to head towards the November 2016 peaks at 0.9300. Support remains down near the 0.9040 area and below that at the 0.8980 area.
USDJPY – appears to be finding support in and around the 108.50 level and above the April lows at 108.13 the next key support. The current rebound could take us back to the 111.30 area but we need to push this area to stabilise.
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