market relief

While all the headlines last week were about Deutsche Bank and the OPEC meeting, this week has seen the pound come under renewed pressure in Asia after UK Prime Minister Theresa May announced that the UK would trigger article 50 sometime towards the end of Q1 2017.

She also announced that she would introduce legislation to repeal the 1972 European Communities Act, with all existing EU laws rolled into UK law, though as far as further detail was concerned she didn’t expand much further.

Despite the volatility seen in Q3 it turned out to be a fairly decent quarter for equity markets, with the FTSE100 posting its best performance since 2013, however Q4 could prove to be much trickier given the events coming up on the horizon, including an Italian referendum and US Presidential election, and we still have the not insignificant problem of a broken European banking system crippled by negative rates.

Friday turned out to be a roller-coaster day for Deutsche Bank hitting a record low on Friday at €9.90, before recovering sharply closing the week higher, at €11.70 on reports that the bank had come to an agreement with the US Department of Justice, that would come in considerably lower than the $14bn amount that investors had been so nervous about.

These reports suggested that the lower amount was in the region of $5.4bn, and would be confirmed at some point over the weekend. Given that there has, thus far been no confirmation of any deal it is probably fortunate that German markets will be closed for a holiday today, though the US ADR shares will be tradeable when US markets re-open.

Predictably Deutsche Bank’s woes have introduced a political element to proceedings with some German politicians accusing the US of waging “economic war”. While the timing and manner of the Department of Justice’s announcement remains questionable given Deutsche’s weak fiscal position, it can hardly be accused of being biased against European banks.

While Deutsche may have enjoyed a brief respite on Friday its troubles continue to mount up as over the weekend some current and former managers were charged by Italian authorities in connection of collusion and falsifying accounts of troubled Italian lender Monte Dei Paschi.

According to rough estimates since 2009 the fine count for US regulators on US banks sees Bank of America top the table with over $75bn of fines with one fine alone of $16.65bn, while JP Morgan has paid out over $40bn in fines. In comparison Deutsche Bank has paid out just over $5bn to date, so it could be argued it has had plenty of time since then to put its house in order. If German politicians want to point fingers then the ECB’s negative rate policy of the last two years, might be as good a place to start, given how it has weakened an already shaky banking system.

On the data front, while this week’s US payrolls data is likely to be a market mover, and a significant event, there is also a host of other data to work through starting with manufacturing PMI’s for September due out throughout the day.

We’ve seen some improvements in the manufacturing sector in recent months, particularly in the UK which saw a sharp rebound in activity in August after the slump in July, post Brexit vote. While the September number is still expected to be ok, it is still expected to come in lower at 52.1, down from 53.3.

Before that we also have Spain, Italy, France and Germany manufacturing PMI’s for September which are expected to come in at 51.6, 50.2, 49.5 and 54.3 respectively.

In the US we also have the latest ISM manufacturing which is also expected to improve from the surprise August slump to 49.4, and expected to come in at 50.4.

EURUSD – still consolidating between two converging trend lines with support at 1.1150 and resistance at the 1.1300 area. A break either side could well trigger a sharp 200 point move in either direction.

GBPUSD – the pound continues to remain under pressure but while above the 1.2900 level the risk remains for a move higher, though a potential break would target the July lows just below 1.2800. We need a rebound through the 1.3120 level to stabilise, and break the cycle of weakness.

EURGBP – while the peaks at the 0.8720 area hold then the risks remain for a move back towards the 0.8600 level, with a break retesting the 0.8480 area. A break through the 0.8730 area targets a potential move towards 0.8800.

USDJPY – continues to look weak with a retest of the 99.50 support a distinct possibility. Currently squeezing higher but while below the 103.00 area the prospect of a move through 99.50 towards 96.00 remains.

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