Global growth slowdown raises easing expectations
By Michael Hewson (Senior Market Analyst at CMC Markets UK)
Concerns about growth prospects in China grew over the weekend after manufacturing PMI slipped much more than expected to 49.2 from 50.1. It was bad news all round as the HSBC measure of manufacturing also dropped, coming in at 47.6, a three and a half year low.
Despite the sharp drop, the falls have raised expectations of additional easing measures by the People?s Bank of China in the next week or so.
It would appear that in the wake of last week?s speech by Fed Chairman Bernanke at Jackson Hole on Friday investors appear to have convinced themselves that additional QE is also now more likely from this month?s Fed meeting on September 13th and 14th.
The reality remains that further measures are likely to be problematic unless this weeks? US payrolls and ISM data is particularly poor. Furthermore the Fed is unlikely to act in a manner that makes the ECB?s task more difficult with respect to the European sovereign debt crisis. Any action by the Fed so soon after any prospective ECB action could temper the effectiveness of it.
Markets are speculating that President Draghi will announce a raft of measures to push yields lower on Spanish and Italian bonds this week on the 6th September at the latest monthly rate meeting. This seems unlikely given that the German constitutional court ruling on the legality of the bailout mechanism the ESM, won?t be known until after the 12th September. ECB officials, only a couple of weeks ago, suggested that any detailed measures might have to wait until after the ruling, so markets once again appear to be getting ahead of themselves.
It is unlikely that Mr Draghi will commit any ECB resources without the cover of full conditionality which means that Spain and Italy would have to commit to full bailout programs, which currently would be politically difficult for both leaders.
For Spanish PM Rajoy it would be particularly damaging, but given the continued deterioration in the economic data it seems only a matter of time.
Today?s Spanish manufacturing PMI is not expected to improve much from the previous months 42.3 reading pointing to an economy is steep contraction.
Final manufacturing PMI numbers for August from France, Italy and Europe are expected to paint a similarly bleak picture with readings of 46.2, 45 and 45.3 respectively. Anyone expecting German numbers to offer a silver lining will also be disappointed with a figure of 45.1 expected.
This week?s UK data are not expected be much better with weekend headlines focussing on government plans to try and generate some form of recovery as both PM David Cameron and Chancellor George Osborne pledge to end the ?dithering? and ?paralysis? in the British economy.
Today?s UK manufacturing PMI data for August is expected to reinforce the task facing the government with the numbers only expected to show a small recovery from July?s 45.4 to 46.1. There remains significant potential for a downside shock given the Olympics last month which could have seen productivity take a dive as the country enjoyed the spectacle of three week?s of sporting success.
EURUSD ? the failure last week to close above the 100 day MA now at 1.2585 just about keeps the short term outlook negative despite a move to 1.2635. The balance of risk continues to suggest further range trading with the longer term support at 1.2420. Only a concerted break of 1.2615 targets the June highs at 1.2750.
To reopen the downside primary trend line support at 1.2405, from the 1.2045 lows needs to be broken.
The key level on a monthly close remains the 200 month MA at 1.2060.
GBPUSD ? the 1.5910 level continues to offer the main obstacle to a move towards 1.6020.
The 61.8% retracement of the 1.6305/1.5270 down move if broken could see the pound move back as far as 1.6060. .
While unable to break through this level the cable remains at risk of sliding back towards last week?s lows at 1.5765. The long term trend line support lies at 1.5555 from the 1.5240 lows.
EURGBP ? last week?s failure to move above 0.7960 and the bearish engulfing candle on the daily charts from last Wednesday keeps the pressure on the downside for a move towards the 0.7880 support area.
A break below the 0.7880 level has the potential to retarget the 0.7820 area, while on the upside a move above 0.7965 targets a move to 0.8000.
USDJPY ? last week?s close below the weekly cloud support suggests we could well see further US dollar losses towards the 78.07 trend line support from the all time lows at 75.35.
While below 78.80 now the risk of a move back to the range and August lows at 77.80 remains.
Above the 78.80 resistance there is also resistance at the 200 day MA at 79.27 which needs to be overcome to target a return towards the highs last month.
Equity market calls
FTSE100 is expected to open 2 points lower at 5,709
DAX is expected to open 5 points lower at 6,966
CAC40 is expected to open unchanged at 3,413
FTSEMib is expected to open 30 points lower at 15,070