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Weak China data set to see Europe open lower.

Weak China data set to see Europe open lower.

Having come off the best month for European markets in six years, it would be easy to think that after the volatility seen since August, that markets appear to have settled down somewhat. This could well be premature in a week where we get the latest snapshot of the US economy, over concerns that the optimism shown by the US Federal Reserve in respect of the domestic economy may be somewhat misplaced. Friday’s employment report will be the latest economic signpost as to what the Fed may do next month with respect to a rate rise. While the recovery seen in European markets in October remains impressive we still remain well below the peaks seen in August just prior to the steep sell-off, and more importantly we haven’t been able to recover back through the 200 day MA, while concerns remain over the health of the Chinese and broader European economic activity. Just under a year ago, on the 21st November 2014 the Chinese central bank made its first cut in interest rates since July 2012 in response to concerns about a slowing economy, in the hope it would boost domestic consumption, and stimulate demand at a time when there was increasing evidence that the Chinese economy was starting to slow down sharply. Since then we’ve seen another five policy easing measures, as well as a relaxation of the US dollar peg to the yuan in an attempt to kick start the manufacturing and services sector of the Chinese economy. On the evidence seen thus far these measures have failed to have the desired effect, with the latest October official manufacturing PMI numbers released over the weekend showing a slight contraction in manufacturing activity of 49.8, still well below the level seen this time last year of 50.8, and the third monthly contraction in a row. The official services sector PMI data was slightly better at 53.1, but even that came in at its lowest level since 2008, as Chinese authorities try to stimulate a recovery in an economy where not only is domestic demand weak, but global demand is also weak. It is therefore not surprising that against this backdrop that Chinese Prime Minister Li stated last week that China would need an average growth rate of 6.53% over the next five years to remain moderately prosperous. Setting aside the fact that the suggested rate seems remarkably specific, the comments do beg the question as to whether the markets are about to be softened up for an official downgrade to growth expectations for the Chinese economy over the next few days. This morning’s weak Caixin manufacturing PMI merely to serve to reinforce market concerns that China’s real growth rate is well below the 6.9% official number reported last month, and as such we could well see further policy easing measures enacted between now and the end of the year. While the weakness in the Chinese economy appears to be less of a worry to Federal Reserve officials than it was a couple of months ago, it doesn’t change the fact that investors remain concerned about weakness in China and the lacklustre nature of the recovery seen in Europe’s major economies. Unemployment in Europe may be coming down slowly but the mere fact that the ECB appears set to embark on further QE measures next month suggests policymakers remain concerned despite a pickup in the manufacturing PMI data in Italy and France, while German PMI data continues to look soft in the wake of the VW scandal. Expectations are for Italy and France manufacturing to improve to 53 and 50.7 respectively, while German manufacturing PMI is set to slip back to 51.6. In the UK in a month when the headlines were all about job losses in the steel industry the latest manufacturing PMI numbers for October are also set to be disappointing, falling back from 51.5 to 51.3. We finish the day with the latest ISM manufacturing from the US which is expected to show further weakness in October, coming in at 50, casting further doubts on the how well the US economy is doing. We did see a surprisingly positive October Chicago PMI on Friday, however a large part of the recovery seen in these numbers was down to inventory restocking, with the employment component and prices paid components both weaker. EURUSD – we’ve found a short term base around the 1.0900 area, with the main support down at the May and July lows at 1.0820. We need to see a recovery back through 1.1115 to stabilise the current downward momentum. GBPUSD – after last week’s rebound off 1.5200 trend line support from the 1.4565 lows and subsequent bullish daily candle we need to take out the resistance at 1.5510, October highs and 200 day MA to suggest a move towards 1.5630. EURGBP – continues to look weak drifting below the 0.7145, 61.8 Fib retracement of the up move from 0.6935 to the highs this month at 0.7495. A move through 0.7145 has the potential to open up a larger move towards 0.7075. USDJPY – last week’s rebound saw the US dollar pull back but the September highs above 121.70 continue to act as strong resistance. Above 122.00 could suggest a return to the 124.00 area. We have support at the 120.20/30 area, with a break retargeting the 119.20 area. 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. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

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