European Services PMI expected to remain weak ahead of US vote
By Michael Hewson (Senior Market Analyst at CMC Markets UK)
While all the attention of markets is directed on todays too close to call US Presidential election, some of the smart money appears to be expecting a narrow Obama win if last night?s late stock market recovery is any indication, with Europe?s markets set to open higher this morning. Whatever happens today the semblance of an outcome is unlikely to be known much before Wednesday so markets could well get a similar day to yesterday?s low volumes.
As doubts about Greece being able to agree on a budget once again start worrying investors the Greek Prime Minister right on cue starts banging the warning drum about the catastrophic consequences of a Greek exit from the euro, if the new budget is not passed and the next tranche of bailout money released.
While such a scenario would be undoubtedly serious, catastrophe seems a strange description for a country in its fifth year of a depression, with no clear exit route out. If that?s not a catastrophe I don?t know what isn?t. In any case the fragmentation within the fragile coalition government already suggests that even if the budget makes it through parliament, the opposition within the country to the measures will probably bring about the fall of the government soon afterwards.
While Greece is undoubtedly in a depression, events elsewhere in Europe point to a recession in Q4 with the release of the final October services PMI numbers for Spain, Italy, France and Germany as well as the Eurozone composite number.
Expectations are for 40.2, 44.5, 46.2 and 49.3, while the composite number is expected to be confirmed at 45.8, all firmly in contraction territory. The Spanish figure is particularly troubling given that Spanish unemployment jumped sharply in October by 128k, well above the 90k estimated.
German factory orders are also expected to decline 0.5% in September.
There appears to be a growing belief that the Bank of England may hold back from further stimulus at this week?s MPC meeting, however the economic data over the past week is likely to make it very much an each way decision. Yesterday?s October services PMI was a disappointment despite staying in expansion territory at 50.9, and was the lowest figure since December 2010.
Retail sales numbers from the British Retail Consortium were similarly disappointing declining 0.1% from a year ago, missing expectations of a 1.3% rise.
If today?s industrial and manufacturing production numbers for September are similarly disappointing, and there is every indication they will be, then we could see some sterling weakness ahead of Thursday?s decision.
Expectations are for a fall of 0.6% in industrial production, on a month to month basis, while manufacturing is expected to show a decline of 0.8%.
Overnight the Reserve Bank of Australia left interest rates unchanged surprising the markets who had expected a cut and sending the Australian dollar sharply higher. Having only just cut rates in October it seems likely that despite concern about higher prices the bank is waiting for the effects of last month?s cut to feed through into the economy.
EURUSD ? Yesterdays close below the 200 day MA at 1.2835 and below 1.2800 shifts the focus towards the 1.2650 level and the 100 day MA. Any rebound is likely to find resistance at the 1.2835/40 level, while a recovery above 1.2900 is needed to stabilise and target last week?s high at 1.3000.
GBPUSD ? we saw the pound find some support at the 1.5950 level yesterday, but we remain on course for a test 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 ? trend line support at 0.7990 from the 0.7755 lows has held thus far while 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 ? we saw the US dollar slip back yesterday, and we could slip back as far as 79.75 without undermining the prospect of a move higher. This level coincides with cloud support 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 19 points higher at 5,858
DAX is expected to open 28 points higher at 7,353
CAC40 is expected to open 10 points higher at 3,458