Last week the OECD became even more downbeat on the performance of the global economy, downgrading its outlook for 2019 as well as 2020.
In doing so it cited a number of challenges including the US-China trade war, a slowing global economy, plus a host of other geopolitical concerns related to the Middle East, as well as Brexit concerns.
We also saw the US Federal Reserve ease monetary policy for the second time in the last two months, though without fully committing to ease further. If anything, it was a little half-hearted in so much as they felt they needed to take out some insurance to offset global concerns elsewhere.
Nonetheless it was enough for equity markets in Europe to just about eke out a small gain, however US markets rolled over after markets in Europe had closed, marking their first weekly decline in four weeks.
The reason for the late falls was renewed concerns over progress on US-China trade after Chinese officials abruptly cancelled a trip to Montana and Nebraska for talks over farming, though the failure to overcome the previous peaks in July may well have also prompted some end of week profit-taking.
This weakness is likely to translate into a weaker open for Europe later this morning, as investors push back any prospect of imminent progress in the trade talks and look to the latest flash PMI data for services and manufacturing.
Concerns about further economic weakness and central bank support for struggling economies has certainly helped support markets in recent weeks, however there is some evidence that economic data is now starting to pick up a little.
For most of this year there has been some significant divergence in recent PMI numbers, particularly between France and Germany, with manufacturing underperforming, while the services sector has managed to hold up reasonably well.
There has been some evidence of a bit of a pickup in recent weeks on the manufacturing front, albeit from very weak levels, while recent business surveys have also been a little more encouraging. In August we did see some minor improvement; however, this needs to be sustained with France looking particularly perky.
In the wake of recent easing from the ECB investors will be looking for the improvements seen in August to be sustained in the hope of a positive end to Q3, as we head into year end and Q4.
In Germany the latest flash manufacturing survey is expected to show a further improvement to 44.6, from 43.5, while services are expected to come in at 54.3, a slight slowdown from 54.8. In France the manufacturing sector has performed slightly better, coming in at 51.1 in August, but is expected to slow to 50.9 for the flash September reading, with services expected to come in at 53.1.
In the US the recent slowdown in manufacturing sector, which makes up 11% of the US economy, prompted St. Louis Fed President James Bullard to push for a 50bp rate cut last week, a solitary voice arguing for aggressive action to deal with a global slowdown.
Today’s flash numbers from the US have the capacity to render that call somewhat kneejerk if they show signs of picking up in September, with manufacturing expected to come in at 50.3 and services at 51.5.
We could also find out later today on the thinking behind James Bullard’s dissent when he speaks later today in Illinois, at a luncheon.
It’s also likely to be another big week for the pound, having rallied for six weeks in a row against the euro, with the Supreme Court set to rule later this week on whether the Prime Minister acted legally in proroguing Parliament. It would be a surprise if the judges were to find against the government, but even if they were to do so it’s not immediately apparent what difference it would make to whether the UK and EU are able to arrive at a deal.
Nonetheless a decision against the government could prompt a significant amount of sterling volatility, as investors weigh up what any government response might be.
EURUSD – still in the downtrend but stuck in a range currently with support at the 1.0925 area. We currently have resistance back near the 50-day MA now at 1.1120. While below here the risk remains for a retest of the lows.
GBPUSD – has continued to edge higher, hitting two-month highs at 1.2582 last week, as it looks to head towards the 200-day MA at 1.2740. We have support at the last weeks low at 1.2380, while below that larger support at the 1.2280 area.
EURGBP – has managed to break below the 200-day MA at 0.8840, finding support at the 0.8795 level initially, which is the 61.8% retracement of the entire 0.8475/ 0.9325 up move. A break below 0.8780 opens up 0.8720. We currently have resistance at the 0.8900 area which should contain any pullbacks.
USDJPY – last week’s failure at 108.50 and bearish daily reversal has seen the US dollar slide back, opening up the prospect of a move back to the 107.20 level, and 106.00/ Only a move back above 108.50 has the potential to negate, and argue for a move to 109.20.
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