Having come off the back of the worst quarter since Q3 2011 European and US markets posted strong gains yesterday to bring to an end a quarter and a month most investors would prefer to forget, as concerns about the Chinese economy, weak commodity prices and uncertainty about the direction of US monetary policy served to weigh on sentiment. The big question now is whether yesterday’s rebound is a harbinger of a change in sentiment or merely a “dead cat” bounce? Today’s open suggests the rebound has some legs as, despite some more weak data overnight we look set for another strong open. Before we look at today though, a quick recap of Q3 and yesterday. The worst performers in the UK in Q3 were from the mining sector with Glencore losing 65% of its value, closely followed by Anglo American with a 40% loss. Commodity prices as measured by the Reuters CRB declined 15% in Q3 underscoring the pressures the basic resource and oil and gas sectors have been under in the past few months, from declining revenues. There was some plusses namely from the airlines sector with IAG and Easyjet posting gains of 15% or more, while SABMiller performed well on M&A speculation. Weak European CPI numbers for September once again re-opened the prospect of an extension to the ECB’s QE program which is due to expire in 12 months. A not unexpected slide back into deflation, at -0.1% due to continued weakness in commodity prices has reopened speculation as to what extra measures the ECB can take, despite the fact that core prices remained stable at 0.9%. While the latest US ADP employment report pointed to a continued resilience in the US labour market for September, the latest Chicago PMI data did nothing to assuage concerns about the chill rippling through the US manufacturing sector after activity slipped down to 48.7, from 54.4 in August. Given concerns about the Chinese economy this morning’s Chinese manufacturing and services PMI data is likely to offer important clues as to whether the recent weakness seen in recent data points looks set to continue. The manufacturing data continues to point to worrying weak levels of activity with the official PMI coming in at 49.8, while the Caixin measure was no better, though it did improve slightly to 47.2 from its 48 month lows at 47. The non-manufacturing or services data was slightly better and here again the official numbers painted a slightly rosier picture than the Caixin numbers. The official number were unchanged at a fairly robust 53.4, however the picture was somewhat different with the independent numbers as they slid from 51.5 to 50.5. These numbers still paint a picture of an economy where the recent easing measures do not appear to showing any evidence of a trickledown effect in the hard data, raising the prospect of further measures in the coming weeks. In Europe we also get the latest manufacturing PMI data for Spain, Italy, France and Germany with only France expected to show an improvement, albeit to 50.4. The remaining three of Spain, Italy and Germany are expected to show readings of 53, 53.4 and 52.5, though the VW scandal could well see a more negative impact to the German numbers. In the UK the latest manufacturing PMI is expected to remain on the weak side at 51.3, down from 51.5. After yesterday’s weak Chicago manufacturing PMI attention now turns to the latest ISM manufacturing reading for September, and given the unambiguously poor readings seen across the board in some of the regional readings in the past month it is hard to be optimistic about this month’s number. Expectations are for a decline to 50.6 from 51.1, but this does seem unduly optimistic given what we’ve seen so far. EURUSD – the convergence of the 50/100 and 200 day MA should continue to act as support near 1.1140 and as such the potential for a move back towards 1.1400 remains. Only a move below the lows this month at 1.1080 suggests a move back towards 1.0820. GBPUSD – continues to find it support around the 1.5120/30 area which suggests the potential for recovery back towards the 1.5330 area. Only below 1.5120 argues for a move towards 1.5000. We need to recover back through the 1.5330 area to stabilise and suggest a return to the 1.5400 area. EURGBP – yesterday’s failure to push on through 0.7420 could well see further declines towards the bottom end of the recent range. A move below 0.7350 could see further losses towards 0.7320 and then 0.7240. USDJPY – the price action continues to respect the range of the past few weeks with resistance around the 121.00 area as the price action continues to compress. Trend line support now comes in at the 119.20 area. The US dollar still looks vulnerable to a return to the 116.20 area seen a few weeks ago. CMC Markets is an execution only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. 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Manufacturing in focus as we start Q4
01:00, 01 October 2015