Markets set to open higher ahead of German IFO and bond auction
By Michael Hewson (Senior Market Analyst at CMC Markets UK)
Investors will be hoping for some respite today after yesterday’s sharp sell-off in equity markets on concerns about continued deterioration in the Spanish economy, as well as disappointment emanating from disappointment about company earnings downgrades. The HSBC Manufacturing PMI data out of China this morning has provided some encouragement, coming in at 49.7, an improvement of the previous 47.9, however despite a jump in new orders the employment component remains weak.
It is to be hoped that today’s economic data out of Europe will do the same if there is any discernible improvement in the latest flash French, German and Eurozone manufacturing and services PMI’s for October which are expected to be nudged marginally upwards from the poor readings earlier this month. The French economy is a particularly worry given it is Europe’s second largest with the manufacturing PMI reading being especially poor dropping to 42.7, but it is expected to be nudged upwards to 43.9, while all the other measures from Germany and the Eurozone are expected to be adjusted upwards as well.
These numbers are likely to be of secondary importance to the latest German IFO figures which are expected to show some improvement in the business climate for the first time since March and could prompt some movement with any significant improvement likely to provide some support. Expectations are for an improvement to 101.60 in October, from 101.40.
Also of particularly interest will be ECB President Mario Draghi’s trip to the lion?s den of the German Bundestag to defend the ECB’s OMT bond buying program, which has drawn fire from the Bundesbank as well as some criticism from German lawmakers.
After two recent failures in September Germany will be hoping to get away around ?4bn of 10 year bonds this morning with the previous auction getting a yield of 1.52% with a bid to cover of 1.2.
We also have the culmination of the latest FOMC meeting in the US which isn’t expected to offer anything in the way of surprises so close to the US election, after the decision by the Fed to start open-ended easing to the tune of $40bn a month, until the unemployment rate comes down to the 7% level.
There is a slim chance we might get some clues about what the Fed intends to do with respect to the imminent end of “operation twist” but other than that the meeting is likely to be a non-event.
EURUSD – the single currency has so far resisted all attempts to break above the September highs at 1.3175 and trend line resistance at 1.3122, from the 1.4940 highs.
The pullbacks seen over the last two weeks have continued to find support above the 200 day MA now sited at 1.2835.
There is also support at Friday’s lows at 1.3010/20 area.
Only a move above 1.3240, targets 1.3495, the 50% retracement of the entire down move from 1.4940 to 1.2045.
GBPUSD – yesterday’s break below the 55 day MA at 1.5980 now opens up the possibility of a move towards the 200 day MA at 1.5825 as well as the September lows at 1.5820.
To stabilise the pound needs to see a move back above the 1.6020 area to reopen a test towards trend line resistance at 1.6150, from the September highs at 1.6310.
EURGBP – the technical indicators are becoming a little mixed after last weeks break of the 200 day MA. Yesterday we saw the single currency post a bearish engulfing day suggesting we could well see a push towards the 200 day MA at 0.8110 in the event we are unable to push above 0.8162. Though the break of the 200 day is positive for the euro yesterday’s price action does suggest a pause for now, with a break of 0.8110 targeting 0.8070.
USDJPY - the break this week above the 200 day MA and the August highs, brings the June highs at 80.60 into view. We need to close above 79.80 on the week to open up a move to 81.00 which is the top of the weekly cloud.
To sustain this move higher any pullbacks need to hold above the 79.20 area, otherwise we could well see a fall back towards 78.50.
Equity market calls
FTSE100 is expected to open 7 points higher at 5,805
DAX is expected to open 32 points higher at 7,206
CAC40 is expected to open 19 points higher at 3,425