It was a mixed day for equity markets yesterday, with US markets slipping back as some improving US data pushed the dollar index close to two week highs , while the FTSE100 outperformed, largely due to a weak pound, along with a firmer oil price, as the main UK benchmark index came within touching distance of the 7,000 level.
With markets in Germany closed for a bank holiday yesterday the focus shifted away from the woes of Deutsche Bank and on to the weekend announcement by UK Prime Minister Theresa May that the UK government would look to trigger Article 50 of the Lisbon Treaty by the end of Q1 next year. The tone of her conference speech and her insistence that the UK would not give up control of immigration, prompted speculation that the UK might well ending up having to leave the Single Market.
Unsurprisingly the pound has continued to act as the shock absorber in that regard sliding back towards its lows in July against the US dollar, close to 30 year lows, while making a three year low against the euro.
Despite the weakness in the currency since the June vote the UK economy has continued to outperform most economists’ expectations, with yesterday’s September manufacturing PMI numbers posting the strongest monthly performance since June 2014 at 55.4. Economic activity improved in all areas, new orders, employment growth as well as economic output.
Exports also performed well largely as a result of the lower pound, while domestic orders also showed an improvement, confounding expectations of a significant slowdown.
The only cloud was an increase in input prices, not too surprising given the 12% drop in the pound in the last three months, however given that the Bank of England has been trying to ignite inflation since 2009, this will probably be welcomed by policymakers.
If today’s September construction PMI numbers and tomorrow’s services data show a similar robustness, then the outlook for Q3 GDP could well see a significant uptick in estimates.
The construction sector has been a significant underperformer in the last three to four months, posting sub 50 readings every month since June. Expectations are for a reading of 49.1, slightly down from 49.2 in August.
The return of German markets today is likely to see Deutsche Bank’s shares come under the microscope again after the face ripping rally on Friday that saw a 14% swing in the share price, from record lows of €9.90 on erroneous reports that the bank was nearing a settlement of $5.4bn with the US Justice Department, a significantly lower figure than the $14bn figure being bandied about in recent days.
The banks US ADR shares closed a little under 1% lower in the US overnight. While the final figure is likely to be much less than the $14bn it seems likely that the bank will still have to raise extra capital at some point given it only has €5bn in provisions, and it is haemorrhaging cash with a cost to income ratio in excess of 90%.
The difficulties being faced by the European bank sector were reinforced yesterday as ING Group became the latest to announce massive job losses of 5,800, coming on top of Commerzbank last week as the low interest rate environment continues to take its toll on a sector, that is being battered by fines, regulation, and negative rates.
EURUSD – still consolidating between two converging trend lines with support at 1.1150 and resistance at the 1.1300 area. A break either side could well trigger a sharp 200 point move in either direction.
GBPUSD – the pound has continued to slide but has thus far managed to hold above the July lows around the 1.2800 level. A break here could well signal a move towards the 1.2500 area. With sentiment so bearish it does remain susceptible to a short squeeze back towards the 1.3120 level.
EURGBP – broke through the 0.8720 level raising the prospect of a move towards the 2013 peaks at 0.8815. We need to hold above the 0.8670 level for this to unfold, or risk a return to the 0.8620 area.
USDJPY – continues to look weak with a retest of the 99.50 support a distinct possibility. Currently squeezing higher, with resistance at 102.20, but while below the 103.00 area the prospect of a move through 99.50 towards 96.00 remains.
