Global economy concerns weigh ahead of US payrolls
By Michael Hewson (Senior Market Analyst at CMC Markets UK)
Yesterday?s market reaction to the combined policy actions of the Bank of England, European Central Bank and the People?s Bank of China is a worrying sign that the drug of central bank stimulus could be wearing a little thin as investors slowly come to the realisation that monetary policy could be starting to reach its limits.
There is only so much central banks can do in the context of a global economy that requires structural changes, therefore company valuations and earnings need to reflect the economic environment they are operating in. With demand in the UK, Europe and China dropping, throwing more money won?t remove the problem of banking systems buckling under increasing amounts of bad debt.
This was sharply reflected in Spanish and Italian 10 year bond yields yesterday as they shot up after Draghi?s comments that ?downside risks to euro area economic outlook have materialised.? Spanish yields hit 6.78%, while Italy?s hit 6% before closing at 5.98%.
Furthermore the more aggressive nature of the Chinese easing also suggests that the authorities are extremely concerned about a hard landing for the Chinese economy.
Even a positive US ADP employment report couldn?t mask the concern felt in the markets that stimulus could well be running out of road. Disappointing US same store sales for June came in at their worst levels in three years yesterday, reflecting increasing concern about the economic outlook whatever consumer confidence numbers would appear to suggest.
Today?s US Non-farm payrolls report will offer important clues as to whether or not yesterday?s ADP report was a one-off.
Expectations are for an increase in June payrolls to 95k, after May?s disappointing 69k, though we could well see a May revision. The unemployment rate is set to remain unchanged at 8.2%.
Another poor jobs number could well raise expectations of further Fed easing, however given the market reaction to the combined central bank efforts yesterday you have to ask yourself how effective any Fed action would be.
In the UK in the wake of the extra £50bn pumped into the economy by the Bank of England factory gate input and output prices are expected to slip back for the second month in a row, reflecting the sharp drop in commodity prices seen since the middle of March, and the slowdown in inflationary pressures.
EURUSD ? the single currency continued its decline yesterday moving below last weeks low at 1.2420 and the trend line from the 1.2290 lows at around the same level.
The next target now becomes the 1.2290 June low which if broken then targets the 2010 post first Greek bailout lows at 1.1880.
Resistance now comes in at the 1.2430/40 level which precipitated yesterday?s move lower to 1.2365.
A move back above the 1.2440 level targets a move back towards yesterday?s highs at 1.2540.
The major upside resistance remains at the 1.2750 level which also coincides with a number of other key resistance levels including the 55 day MA at 1.2745 and 50% retracement level of the 1.3285/1.2290 down move at 1.2790.
GBPUSD ? the weakness in sterling saw the 1.5580 level give way yesterday bringing the pound back to the key support at the 1.5480 level, 14th and 15th June lows, which we failed to get below last week. This really is the line in the sand for a move back to the June low at 1.5270.
The 200 day MA at 1.5755 remains the key resistance on the topside.
Only a close beyond 1.5755 the 200 day MA could target 1.5910, which would be the 61.8% retracement of the 1.6305/1.5270 down move.
EURGBP ? euro weakness remains the predominant them here with the 0.7950 level increasing in importance. A break here targets a move towards 0.7845 and the November 2008 lows.
Once again the main resistance remains around the 55 day MA at 0.8067 and trend line resistance from the highs this year at 0.8505 at 0.8078. As long as any pullbacks stay below these levels then further euro losses are the preferred scenario, otherwise we?re looking at resistance at the 0.8150 area.
USDJPY ? the trend line support at 79.45/55 from the 4th June lows at 78.00 continues to support the US dollar here.
The main resistance remains at the top of the cloud at 80.45 and the support above the 200 day MA at 78.80. To reiterate we need a weekly close above 80.50 to reassure about further upside.
Equity market calls
FTSE100 is expected to open 20 points lower at 5,673
DAX is expected to open 34 points lower at 6,502
CAC40 is expected to open 27 points lower at 3,202
FTSEMib is expected to open 55 points lower at 14,030