Yesterday’s disappointing equity market reaction to a number of better than expected economic reports
could well mark the beginning of some end of year profit taking, a not unreasonable supposition given the gains seen so far this year, and given the proximity of a number of key economic announcements, due later this week, which could have a bearing on the outcome of this months, and the last Fed meeting of 2013 in a couple of weeks’ time.
Today’s European market open is expected to display similar weakness
to last night’s US close, with the Dow falling sharply, though it is noteworthy that the S&P500 did manage to stay above the 1,800 level.
The latest November Chinese services PMI
followed on from the weekend manufacturing data in pointing to a continued pickup in Chinese economic activity coming in at 56, slightly below the previous 56.3.
While there were a number of positives to take from yesterday’s economic reports it was noticeable that we continued to see evidence of problems in France
, and the possibility of a return to recession, while Spain also experienced a sharp contraction
in manufacturing activity as well in November. Today’s unemployment change for November
is expected to show another 50k added to the unemployment total after October’s 87k rise, as seasonal hires continue to come to an end.
Europe’s 1st and 3rd largest economies of Germany and Italy
continued to improve but concerns about the banking system in Italy have tempered enthusiasm
about the current sustainability of the recent recovery, and with inflation remaining low the last thing the banks need right now is low rates that could impact their ability to generate profits, as their margins get squeezed by tighter spreads.
Today’s EU PPI numbers
are expected to show a drop of 0.2% in October, as the continued fiscal readjustment across Europe continues to weigh on prices.
In the UK
there appears to be no concerns about a slow down in growth after the November Manufacturing PMI
came in well above expectations at 58.1. More importantly job creation in the sector hit a two and a half year high, boosting optimism that the unemployment rate would continue to come down in the coming months. It seems unlikely that today’s construction PMI number
will show similar resilience but it is still expected to be strong with expectations of only a small decline from 59.4 to 59.
Given the current strength of the pound the next problem for the Bank of England could well be a continued rise in the pound
, particularly if it continues to gain at its current pace. With the latest Bank of England meeting this week, we do need to be prepared for some comments designed with the sole intention of limiting the potential up side in sterling.
– having failed to get above the 1.3650 level the risk remains for a pullback towards the 1.3480 area
Any pullbacks need to stay above the 1.3480 area for the current positive momentum to continue and a potential test of long term trend line from the all-time highs at 1.6040 which comes in at 1.3940.
Only a break below the 1.3480 level would then argue for a move to the lows last week at 1.3400, and then below that 1.3300.
– another new high for sterling at 1.6445 yesterday, its highest level since August 2011, but it does have the feeling of a blow out top, or gravestone doji after we closed below Friday’s close last night. If confirmed we could well see some profit taking kick in and move back towards support at 1.6250.
Pivot support remains at 1.6110, a break of which argues for a move back to the multi week support at 1.5880/90.
– yesterday saw the test and break below towards 0.8280, the 50% retracement of the entire up move from the 2012 lows and the high this year. Having broken through here we could well see a test of 0.8170 the 61.8% level, but for now we could well see a short squeeze unfold back towards 0.8370, after yesterday’s 0.8252 lows.
Only back above the highs last week near the 0.8400 level would suggest the risk of a larger squeeze higher.
– the highs this year at 103.75 remain the principal objective, and main obstacle to a move to 105.00. Any pullbacks could well find support at the 100.60 level, and if we were to break below the 99.20 level we could see a deeper fall towards 98.50.
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