It was a month of contrasting fortunes for global stock markets with US markets continuing to make new record peaks and the S&P500 posting its best quarter since 2013, while European markets, as well as emerging markets, have struggled against a backdrop of concerns about escalating trade tensions, rising US interest rates and other geopolitical factors.
As we head into Q4 it seems quite likely that any number of these factors is likely to continue to weigh on investor concerns, unless we see some signs of escalation risk subsiding, though reports of an imminent NAFTA deal has helped Asia markets, and look set to overspill into a positive European open this morning .
For now concerns about trade, rising US rates, Brexit, Italian politics as well as a rising oil price all have the capacity to act as drag on any possible rebound as we head towards the end of the year.
Friday’s late sell off dragged markets in Europe into the red led by a sharp selloff in Italy, as a result of concerns about the new Italian government’s spending plans, in defiance of market expectations that they would take measures to reduce the level of overall debt, in accordance with requests from Brussels.
The latest budget proposal, while below the 3% limit was eventually agreed at 2.4% of GDP, a move that could well see the Italians censured by EU authorities. The EU wanted the budget to come in under 2% of GDP, so as not to add to the overall level of government debt, which is already well above 130% of GDP, while finance minister Giovanni Tria was looking to steer a middle ground and get the number to come in at a level which kept overall debt levels on an even keel, at about 2%.
The defiance of the new government in seeking to deliver on its election pledges saw Italian yields spike sharply higher, while concerns about possible ratings downgrades, saw bank shares clobbered.
As we head into Q4 the economic backdrop continues to look uncertain, with trade concerns still front and centre, though reports that the US and Canada have managed to come to an agreement on a new NAFTA deal has helped boost Asia markets overnight.
Despite this, concerns about a growth slowdown in China remain after the latest data showed that the manufacturing sector stagnated in September, with the latest manufacturing PMI’s both slipping back, and export orders slowing sharply. On the plus side the services sector did see an improvement in activity, coming in at 54.9, up from 54.2.
This week the main focus is likely to remain on trade, as well as the latest economic data with the latest manufacturing PMI’s from Europe, which have continued to weaken, while the pound is once again set to be in the cross hairs as the Conservative party conference gets under way with Prime Minister May set to face further criticism over her so called Chequers plan, which no one seems to want, except her.
The latest UK manufacturing PMI for September is likely to see a slight softening of economic activity to 52.6 from 52.8, while last week’s Q2 GDP revision saw the annualised number revised lower to 1.2%, as Q1 activity was downgraded slightly.
The US dollar had a very solid week last week, posting its biggest gain in a while after the Fed raised rates for the third time this year. The central banks ambiguity over where it was in its hiking cycle had the perverse effect of pulling yields off their peaks, while pushing the US dollar higher, however most of the gain in the US dollar index is likely to have been as a result of a weak core inflation reading from the EU, as well as political concerns over events currently playing out in Italy.
Nonetheless it continues to remain clear that the US central bank is in no mood to call a halt yet to the pace of its monetary tightening and this week’s US data could help reinforce that, culminating in this coming Friday’s September payrolls and wages report.
EURUSD – remains under pressure with the September lows the next key support at 1.1520. A move below 1.1500 opens up a retest of the August lows at 1.1300. We need a move back above 1.1690 to stabilise and a return towards the 1.1750 area.
GBPUSD – currently holding above support at the 50-day MA at 1.2990, however the pound is looking vulnerable, with a break lower arguing for a return to the 1.2870 area. We need to see a move back through 1.3220 to argue for a return to the 1.3300 area.
EURGBP – currently holding on to support just above the 0.8870 area and 100-day MA. A move below the September lows at 0.8845 could well see further losses. Resistance comes in at the 0.8940 area with the bigger level remaining back at 0.9040.
USDJPY – moved up through the 113.20 level and the highest levels this year bringing the prospect of a move towards the November 2017 peaks at 114.73. Support now comes in at the 112.60 area and below that at 111.80.
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