For two days in succession the S&P500 has opened higher, made a new high and then closed lower, which suggests that investors are by no means confident about further upside progress.
The conundrum they seem to be weighing up is whether an improving US economy will prompt an earlier than expected rise in interest rates, and whether that will be enough to sustain US markets at their current rather lofty valuations.
Yesterday’s Beige Book was a significantly bland affair
with modest growth over the last six weeks with tourism and auto sales driving expansion if you’ll forgive the pun. Wage pressures were also a problem in some areas, due to a lack of skilled workers, but overall the survey proved to be pretty unremarkable underlining perhaps the Fed’s caution about some aspects of the recovery.
The main focus today, apart from having one eye on events in Ukraine, will be on central banks, most notably the European Central Bank rate meeting later today
Ever since Mario Draghi made his speech at Jackson Hole in August markets have been speculating that we could well see some extra measures unveiled today, either in the form of further rate reductions or an announcement of further easing measures in the form of asset purchases of some description.
Some of the most recent economic data has done nothing to dissuade markets that we might see something today, but while we may see the ECB revise its inflation and growth forecasts
we still haven’t seen the end product with respect to the measures that were announced in June and the TLTRO’s.
It would therefore be most odd, and out of character to see the ECB take further steps
before they have seen the results of their previous measures.
Markets also appear to be overlooking other comments made by Mario Draghi that countries who have made reforms are now doing better,
like Spain and Ireland and that the reason Italy and France are underperforming is because they haven’t. This belief has been reinforced this week, and it is something Draghi will no doubt point out again.
This would therefore suggest that no action today remains the most likely outcome
, and all this talk of asset purchases is premature. After all we still haven’t seen the results of the bank stress tests as part of the (AQR) asset quality review yet, and another rate cut would merely be window dressing on the margins.
Furthermore any talk of the announcement of an asset purchase program, or QE is likely to be wishful thinking,
if recent remarks from German finance minister Wolfgang Schaeuble last week are any guide, which suggests the scope for disappointment remains high.
What we might get details on is progress on the ABS program that the ECB has tasked BlackRock to design for it
, to help ease credit conditions and maintain price stability in the euro area, so once again the press conference is likely to be the main focus of market attention. Over to you Mario!
German factory orders for July
are expected to bounce back from the 3.2% decline in June with a 1.6% rise expected.
Before the European Central Bank rate meeting we have the latest Bank of England meeting and despite the two dissenters at the July meeting we’re pretty much expected to see the status quo maintained
here, if for no other reason than we’re two weeks away from the Scottish Referendum vote and they would be hardly likely to raise rates now, given the nervousness being seen in financial markets over the past couple of days.
In the US
the aperitif before tomorrow’s employment report is the ADP employment report for August
and here we are expecting a gain of 218k jobs, pretty much in line with July’s number.
Weekly jobless claims are expected to come in at 298k,
while the services ISM for August is expected to slip back a little to 57.3 from 58.7 in July.
– the euro appears to have found some support at 1.3105 but remains on course for a move towards 1.3020. This remains a key support being that it is a 50% retracement of the move from the 2012 lows at 1.2042 to the 1.3993 highs earlier this year. On the upside the euro needs to push back through the 1.3230 level and fill the gap from 22nd August to stabilise.
– while below the 1.6520 level the risk of further losses towards 1.6250 and the lows this year remains, given that we managed to trade below the 1.6460 lows in March, which should have given us more of a rebound. This remains the next objective, though a move above 1.6520 could well delay that. Trend line resistance from the July highs comes in at 1.6610.
- the euro is currently closing in on the trend line resistance from the August highs, currently sitting at the 0.8000 level. If we break through here we could well see a sharp squeeze towards 0.8035. While below the 0.8000 level we can’t rule out a move back towards the July lows at 0.7875
- the US dollar continues to close in on the highs this year at 105.50/60. While above the 103.50 area the risk remains for a move towards 105.50. This remains a huge level given it was the recent high from the end of last year, as well as the 61.8% Fibonacci retracement of the decline from the 2007 highs at 124.13 to the lows 75.58 in 2011.
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