Chinese exports slide sharply
By Michael Hewson (Senior Market Analyst at CMC Markets UK)
This morning?s Chinese trade data, following on from yesterday?s disappointing industrial production and retail sales data showed a sharp drop in both imports and exports, and pretty much confirmed the prognosis that the global economy, as well as the domestic economy, has not only got a chill, but could well be heading towards full blown pneumonia.
If investors are hoping that the engine of the Chinese growth will help keep the global economy ticking over they could well be in for a disappointment. Exports slid to 1%, from 11.3% in June, highlighting a significant lack of global demand, while imports also slowed from 6.3% to 4.7%, as Chinese demand for commodities slowed as well. There?s no point in producing stuff you then can?t sell.
Even so this week looks like another positive week for equity markets in spite of some pretty dire economic data from pretty much all over the world. Fears of a hard landing in China, poor German and Italian industrial production data and awful UK trade data are nothing to write home about, and yet markets have simply shrugged them off and maintained their resilient tone.
The reasons are fairly simple and largely to do as a result of how poor the data actually is.
The expectation is that the worse the data, the more likely it will be that central banks in China, the UK and the European Central Bank will step in to support asset prices, by easing monetary policy further.
Even in the US, where the data has been slightly better, the expectation is that the Fed will look to announce further easing measures at its September meeting. This expectation of jam tomorrow, as well as low volumes is pretty much the only thing supporting equity markets at the moment, which makes the gains pretty tenuous.
The worry is that expectation is one thing, but delivering is something else, and the barriers to intervention by both the ECB and the Federal Reserve are very high indeed.
While today the expectation is that German CPI for July will remain at 2% year on year, there is a concern that prices could well start to edge back up. The price of oil in euro terms is back above ?90 a barrel, after being at ?70 in June. With food prices also edging back up, fear of inflation in the coming months could become a major pressure point in the coming months at the ECB; amongst policymakers as economic conditions deteriorate in the more vulnerable parts of Europe.
In the UK July factory gate input and output prices could well start to edge back up after showing welcome declines in June. Expectations are for a rise in input prices of 1.4%, up from a 2.2% decline in June and a rise of 0.1% in output prices, up from a 0.4% decline in June.
EURUSD ? the failure to break the 55 day MA and resistance in the 1.2430/40 area, finally precipitated a pullback below the 1.2300 area. As long as we hold above the 1.2220/30 area then short squeezes back to 1.2400 are very possible. A break below 1.2220 retargets the 1.2150 area as well as the 1.2060 lows.
We remain mindful of the bullish weekly candle from two weeks ago which still suggests we could be gearing the market up for a euro rally.
The key level on a monthly close remains the 200 month MA at 1.2060, the July lows.
GBPUSD ? upside remains limited while below the 200 day MA and resistance between 1.5740/80. Above here and we could see a move to 1.5910.
Key support remains at the trend line support at 1.5480 from the 1.5270 lows and any push lower needs to hold to prevent a move back to 1.5270.
Only a close below 1.5240 signals a risk of a return to the July 2010 lows at 1.4950.
EURGBP ? yesterday saw the euro drop through the 0.7880 area which brings trend line support at 0.7835 from the 0.7755 lows into play.
A break below here retargets the 0.7820 area, and then the July lows at 0.7755. On the upside the 55 day MA remains strong resistance at 0.7960, along with trend line resistance at the same level from the February highs at 0.8505.
USDJPY ? this is becoming a boredom trade becalmed between support below 78.00, and resistance above 79.30.
The cloud support at 77.30 and the May lows at 77.60 remaining a key level. As long as this holds the downside, the risk of a rebound remains quite high.
A move above the 79.30 level brings the 80.00 level back into play and then by definition the main resistance at the top of the weekly cloud at 80.45.
Equity market calls
FTSE100 is expected to open 22 points lower at 5,829
DAX is expected to open 44 points lower at 6,921
CAC40 is expected to open 15 points lower at 3,442
FTSEMib is expected to open 57 points lower at 14,597