A lack of positive news weighed on European equity markets yesterday and the FTSE 100 was the under performer of the bunch.
Keep in mind the London market was closed on Monday as it was a UK bank holiday, and continental markets finished lower that day, so it was like the British market was playing catch-up yesterday – it traded at its lowest level since mid-May. Meanwhile, the bullish run on US tech stocks continued as the NASDAQ 100 outperformed and set another record close. The S&P 500 set a record close too.
Australia slipped into a recession as the economy contracted for a second consecutive quarter. In the latest quarter, the economy shrank by 7%, a bigger contraction than expected. Equity markets in Asia are mixed, and European indices are set to open higher.
There was a raft of manufacturing reports published yesterday, and they were varied. The Caixin survey of Chinese manufacturing for August was 53.1 – its fastest rate of expansion in nine years. In Europe, the picture was less optimistic, as the Spanish, Italian, French and German readings were 49.9, 53.1, 49.8 and 52.2 respectively. It is worrying the Spanish and French reports showed negative growth as it suggests the rebound in activity in the wake of the economies being reopened was short lived. The Italian update was the fastest growth rate in two years, and there were no major surprises from the German reports as it was a little below economists’ forecasts. The UK reading was the most impressive from Europe as it was 55.2, a fraction lower from the July level. The British economy reopened after the economies in mainland Europe, so that’s probably why the UK’s reading stood out.
The eurozone CPI reading fell from 0.4% in July to -0.2% in August, and the core metric dropped to 0.4%, from 1.2%. The declines point to a fall-off in demand, and that ties in with some of the manufacturing PMI reports. There is a lot of trade between Europe and the US, so it is concerning that eurozone CPI declined, when the latest UK and US CPI reports showed gains. The sudden fall in euro area CPI could be a sign the euro area’s recovery is under threat.
There was some positive news from the eurozone yesterday, as the German government revised its forecast for the German economy for 2020 from -6.3% to -5.8%. Germany is the largest economy in Europe, so if its economy doesn’t decline as much as initially predicted, that should bode well for the bloc as a whole.
The manufacturing industry in the US is still enjoying a rebound. The final reading of the manufacturing PMI report for August was 53.1 and that was the fastest rate of growth in more than two years. The more closely watched ISM manufacturing update increased from 54.2 in July to 56 in August. The finer details of the ISM report were largely positive. The employment component was disappointing as it was 46.4, but the prices paid and the new orders metrics were 59.5 and 67.6 respectively – both are very encouraging.
The US dollar index had a volatile session yesterday. In the early part of the day, it dropped to a 28 month low, but in the afternoon it turned around – the ISM update boosted the currency. The greenback finished higher on the day, but it still has a long way to go before it shakes off the overall bearish trend.
Gold hit a two week high when the dollar was soft, but it was pushed into the red when the greenback rebounded. Silver had a similar move. Copper was helped by the Chinese manufacturing data and it hit a 26 month high, but it was also dented by the firmer US dollar. Palladium and platinum finished off the highs of the session.
China is the largest importer of oil in the world so WTI and Brent crude pushed higher yesterday thanks to the impressive manufacturing report from China. The energy market was coming from a relatively low base as it drifted lower at the back end of last week.
German retail sales will be posted at 7am (UK time) and it is expected to be 0.5%, and that would be a big rebound from the -1.6% registered in June.
The Nationwide HPI reading is tipped to show a 0.5% increase in August, which would be a cooling from the 1.7% registered in July. The reading will also be posted at 7am (UK time).
Eurozone PPI reading is anticipated to increase from -3.7% in June to -3.4% in July. The PPI rate can often act as a front runner for CPI, because if prices change at the factory level, they will probably change at the consumer level too. The report will be published at 10am (UK time).
The ADP employment report is expected to show that 950,000 jobs were added last month, and that would be a big improvement on the 167,000 created in July. The details will be released at 1.15pm (UK time).
The Bank of England governor, Andrew Bailey, will testify before the Treasury Select Committee at 2.30pm (UK time).
At 3pm (UK time) the US factory orders report will be posted and economists are expecting 6%, and keep in mind the June report showed 6.2% growth.
The EIA report is tipped to show that US oil and gasoline inventories fell by 1.88 million barrels and 3.03 million barrels respectively. The announcement will be posted at 3.30pm (UK time).
EUR/USD – has been in an uptrend since April and if the bullish run continues it should target 1.2000 or 1.2140. A pullback might find support at 1.1696 or at the 1.1600 zone.
GBP/USD – while it holds above the 1.3000 mark, the bullish trend that has been in place since late June should continue, and it might target 1.3515. A move back below 1.3000, could see it target the 1.2800 zone.
EUR/GBP – since late July it has been pushing lower and a break below 0.8900 should put 0.8864 on the radar. A rally might run into resistance at 0.9069.
USD/JPY – while it holds below the 100-day moving average at 106.95, the broader bearish move is likely to remain intact. A move through 105.10 could see it target 104.18. A break above 107.00, should bring 107.94, the 200-day moving average, into sight.