UK Services PMI set to show expansion again
By Michael Hewson (Senior Market Analyst at CMC Markets UK)
Despite a much better than expected US jobs number last Friday, market reaction while initially positive, failed to spark a sustained rally, eventually causing US markets to finish sharply lower, ahead of this week?s US presidential election, with the gap between the candidates still too close to call with voting set to go the wire.
Though the US presidential election remains the primary focus in the early part of this week, with the uncertainty likely to act as a drag on markets, we also have a number of important central bank rate decisions later this week including the latest Bank of England rate decision, as well as the latest ECB and Reserve Bank of Australia (RBA) rate decisions.
While the RBA is expected to cut rates again by 25 basis points to 3%, early tomorrow morning no such rate action is expected from the ECB, or the Bank of England for that matter.
As far as the Bank of England is concerned there had been a widespread expectation, until the most recent Q3 growth numbers, that the MPC would increase its asset purchase program by an extra £50bn to £425bn at this week?s meeting. This is now by no means certain given recent comments by members like deputy governor Charlie Bean, as well as Governor Mervyn King himself, questioning the effectiveness of recent QE.
There has also been growing concern that the policy of QE could well be causing more harm than good especially with respect to rising pension deficits, which are forcing companies to put aside higher provisions, instead of increasing their capital investment in order to boost growth.
Weekend comment in some quarters has added to the uncertainty over policy action this week, even though early indications do suggest that Q4 looks likely to be disappointing from an economic point of view.
Last week?s October manufacturing PMI data proved to be disappointing once again, and even though construction PMI improved after two months of contraction, there was some worrying weaknesses in those figures as well.
Given that services makes up nearly two thirds of the UK economy, a good October services PMI number today could well give a significant steer on the likelihood of easing this week, irrespective of tomorrow?s manufacturing data for September. Expectations are for services PMI to come in at 52, down slightly from September. It is also noteworthy that services PMI, despite the UK economy being in recession from Q4 last year, have shown expansion in every month this year, and last contracted in January 2011.
In Europe the latest Spanish unemployment numbers for October are expected to show an increase of 90k, up from a rise of 79.3k the previous month, while in Greece the government will present its latest austerity package to parliament for debate at the same time as unions start a series of 48 hour strikes in protest at the new measures.
EURUSD ? Friday?s sharp fall saw the euro fall through a number of support levels but just about close above the 200 day MA, falling just shy of its October lows at 1.2805. Could it be the golden cross has been a euro bull trap?
To reiterate we need to see a move below 1.2800 to retarget the 1.2650 level and the 100 day MA.
A recovery above 1.2900 is needed to stabilise and target last week?s high at 1.3000.
GBPUSD ? Thursday?s gravestone Doji certainly provided an early warning of Friday?s sharp decline with a sharp decline through 1.6050 and opens the risk for a move towards 1.5910 and 38.2% retracement of the 1.5270/1.6310 up move. Below that we also have the 200 day MA at 1.5845, a break of which could well target further rapid declines.
The pound needs to get above 1.6080 to open up a move back towards last week?s high at 1.6180.
EURGBP ? despite a brief dip below the 0.8000 level the 55 day MA just about held, however the risks remain lower and for a test of trend line support at 0.7985 trend line support from the 0.7755 lows. A break below this support targets 0.7955 50% retracement of the up move from 0.7755 lows to the 0.8165 highs.
A recovery above 0.8030 is needed to retarget last week?s high at 0.8075.
USDJPY ? last week?s close above 80.00 opens up the potential for further gains given the weekly close inside the cloud. Pullbacks should find support at 79.75, the cloud base with the potential to move towards 81.80 at the top of the cloud initially.
Below 79.75 retargets 79.20.
Equity market calls
FTSE100 is expected to open 23 points lower at 5,845
DAX is expected to open 26 points lower at 7,338
CAC40 is expected to open 12 points lower at 3,480