European markets underwent another day of declines yesterday as emerging market turmoil and trade concerns combined to keep investors on the back foot. US markets which for the most part saw a decent August performance also came under some early pressure on their return from the extended Labour Day bank holiday, and this weakness spilled over into Asia this morning which saw further falls.
On the data front the latest China Caixin services PMI numbers showed further weakness in August coming in at 51.5. well below the market consensus. On the other hand Australian GDP jumped sharply to 3.4% in contrast to the turmoil being experienced by its closest neighbours where fears of an emerging market contagion hit stocks and currencies across the region.
All of this weakness still didn’t prevent Amazon following Apple in becoming, albeit briefly, the world’s second $1trn company as the big A’s continued to break new records, while the rest of the equity complex struggled.
The main preoccupation for investors continues to be on whether the US is serious about arriving at some form of deal with Canada over NAFTA in the wake of President Trump’s tweets at the weekend, that it wasn’t and isn’t a political necessity to get a deal. In addition to that anxiety levels are growing ahead of the weekend and the possible imposition of another $200bn worth of tariffs on Chinese goods later this week.
Commodity prices also fell sharply with silver, prices falling to a three-year low, while copper prices fell back to the two-year lows seen early last month. This week’s weak China PMI data along with a strong US dollar is putting downward pressure on metals prices over concerns that China’s economy is cooling sharply on the back of rising trade tensions.
Today’s services PMIs for Spain, Italy, France and Germany could paint a similar picture to the disappointing manufacturing numbers seen earlier this week. Expectations are for a slowdown to 52.1, 53.2, 55.7 and 55.2 respectively, as trade concerns weigh on business activity.
The US dollar had another strong session yesterday, not only rising against its major peers, but also against a range of emerging market currencies. Another decent ISM manufacturing report for August showed that economic activity rose to its highest level since 2004, with good gains in the employment, new orders and production components. Prices paid was also resilient even though they did slip back slightly to their lowest levels this year.
The pound had another difficult day, though it did regain some ground against the euro, despite a poor construction PMI number which followed on from a weaker than expected manufacturing PMI report from Monday. This places a lot more emphasis on the services PMI number which is due out later this morning with the possibility that we could similar weakness in this report. Expectations are for a slight improvement to 53.9 from 53.5 in July, with the composite number also expected to improve to 54.
The Bank of Canada has a big decision to make today with respect to the Canadian economy, and a possible rate rise from 1.5% to 1.75%. A weak currency against the US dollar, currently close to 18 month lows, has seen the inflation rate push up to 3%.
There has been rising speculation about the timing of a rate rise given concerns about the inflationary effects a weak currency is having on the Canadian economy. GDP growth is still fairly decent at 0.7% in the last quarter, and unemployment fell sharply to 5.8% last month, so it is feasible that we could see a rate rise today, as a means to pre-empt the Federal Reserve which is widely expected to raise rates for the third time this year, when they meet next in two weeks’ time.
The smart money appears to be on an October move in response to a Fed move later this month, as well as the political concerns surrounding a NAFTA agreement, however the Bank of Canada does have previous when it comes to surprising the market so a surprise move today wouldn’t be entirely out of character, given that the main economic data still remains fairly strong. If the Bank of Canada does hold today then we can probably expect to see a hawkish statement, NAFTA concerns notwithstanding.
EURUSD – has found some support just above the 1.1520 area, with the pressure remaining on the downside while below the 1.1630 area. The 1.1750 level remains the bigger resistance level and remains a significant barrier to further gains. Below 1.1500 retargets the 1.1300 lows.
GBPUSD – found some support just above the 1.2800 area, before rebounding. We need to see a recovery above the 1.2930 level to stabilise and retarget the 1.3045 level and 50 day MA. Below 1.2800 retargets the lows at 1.2660.
EURGBP – given the key reversal day and a key reversal week, the bias remains for a move lower while below resistance which is now at the 0.9040 area. We need to see a move below 0.8970 to boost confidence in this scenario, and move towards 0.8920 and the July lows at 0.8860/70.
USDJPY – finding resistance just below the previous highs at 111.80, and the daily Kumo cloud. A break above 112.00 targets a move towards the July peaks at 113.20. While below 111.80 the risk remains for a move towards 110.60 cloud support area. The major support sits back on the 200-day MA at 109.80.
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