In the absence of US markets, it was a decent start to the week for both Asia and European stocks yesterday, with Friday’s weak payrolls report fuelled an expectation that the US Federal Reserve might have to push back the timeline of any tapering program.
The prospect of a new government in Japan is also helping to support the positive narrative, on the basis that a new administration will embark on new measures to stimulate the Japanese economy in the coming months.
Behind this narrative of delayed central bank action, is a concern that the global recovery is starting to lose traction, however this morning’s China trade data for August rather belied that expectation as the numbers came in much better than expected.
Recent data from Germany had already shown that exports to China had fallen to a one-year low, indicating that the world’s second largest economy was experiencing a slowdown in domestic demand, however the August import data confounded that perception by improving significantly from 28.1% in July, to rise by 33.1%. This improvement came in spite of the disruption at Chinese ports, as well as the disruption caused by Covid lockdowns. On the exports front there was also a pickup in demand as we saw a rise from 19.3% to 25.6%, driven by a rise in demand out of the US and EU, which appeared to be driven by retailers bringing forward their pre-Christmas order spend over concerns about supply chain disruption.
In a not unexpected move the Reserve Bank of Australia left monetary policy unchanged at its latest policy decision earlier this morning, although there was an expectation in some quarters that they might reverse their August decision to cut their weekly bond purchase program from $A5bn to $A4bn a week. This didn’t happen, although the bank was careful not to rule out the prospect if economic conditions worsened further, with the bank extending the horizon to tapering into February next year, reflecting the concerns that any recovery was likely to take longer due to the various lockdowns.
Markets in Europe look set to give up some of the gains from yesterday when they open later today, with the main focus set to be on the latest German ZEW survey for September.
In August this survey saw a sharp drop from 63.3 in July to 40.4, and despite the recent rise in the DAX back close to the 16,000 level is expected to see a further decline to a 17-month low of 30.3 later today, as investors become more cautious ahead of this month’s German election.
The final iteration of EU Q2 GDP is expected to be confirmed at 2%.
It will also be worth keeping an ear out for comments from Bank of England MPC member Michael Saunders this morning as he addresses an online event.
At the last meeting Saunders dissented on the bond buying component of the recent policy decision. Saunders' concerns appear to be over how transitory or otherwise inflation levels were likely to be in the coming months, and while CPI in July fell back to 2%, from 2.5% in June, next week’s CPI numbers for August could well see that number rise again. given the upward pressure being seen in the various PPI measures as well as the PMI reports.
EURUSD – while below the 1.1910 resistance area the risk remains for a move back to the 1.1800 area. The 1.1780/90 area remains the key support area. We need to overcome the 1.1920 area to retarget the 1.1975 level.
GBPUSD – the 1.3900 area remains a key resistance area, but as long as we can hold above the 1.3820 area the bias remains for a move higher, through 1.3900 towards 1.4000. Trend line support at 1.3780 needs to hold for the current rebound to continue, or risk a move back to the 1.3680 level.
EURGBP – while below the 0.8600 area the bias remains for a move back to the 0.8550 area, on the way to 0.8520.
USDJPY – the 110.00 area remains a key resistance level, with the bias for a retest of the 109.10 area while below 110.20. A move below the 109.10 area targets the 108.60 area.
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