Europe set to open higher as Chinese PMI data improves

The fact that it is Thanksgiving in the US today is likely to see most of the day’s price action take place this morning, with volumes declining in the afternoon but there’s still certainly plenty to occupy the attention of investors, with equity markets set to open slightly higher after Chinese HSBC manufacturing PMI number for November, came in at 50.4, and rose above 50 for the first time since October last year, raising hopes that the Chinese economy may be starting to rebound.

Putting aside and parking the perennial problem of Greece and the preoccupation about its debt to GDP ratio and debt sustainability for a few days, there remains the problem of a European economy mired in recession, with EU leaders too preoccupied with meetings and protracted budget negotiations to notice that growth is non-existent and unemployment continues to rise rapidly.

This is expected to be reinforced by preliminary November manufacturing and services PMI for France, Germany and the aggregated Eurozone numbers, which aren’t expected to show much of an improvement on figures a couple of weeks ago.

Needless to say while some small improvements are expected, the numbers still point to a Q4 in Europe firmly in contraction with Germany starting to feel the proverbial chill quite sharply.

Expectations are for France manufacturing and services PMI to improve slightly to 44.1 and 45.3 respectively, while Germany manufacturing and services is expected to remain unchanged at 46 and 48.4.
The Eurozone numbers for manufacturing and services are expected to improve slightly to 45.6 and 46.1.

Despite Bank of Spain governor Linde stating that Spain was likely to miss its debt targets for 2012 Spanish bond yields slid back on the 10 year yesterday to around 5.77%.

Even though Spain is fully funded for this year, it appears that they are taking advantage of the slightly more favourable conditions to get ahead of the curve with respect to next year’s funding needs of over €200bn, with a 10 year auction today.
A previous auction saw a bid to cover of 1.9 and yields of 5.46%.

Yesterday’s Bank of England minutes showed that there was little enthusiasm for further QE at this stage despite David Miles wanting to add a further £25bn to the £375bn worth of QE already done. The bank suggested that Q4 could well see a mild contraction but remained cautious about the inflation outlook, suggesting that further QE remains unlikely this year, given the 8-1 decision to hold fire.

While concerns remain about the recent dip in the manufacturing sector, today’s CBI industrial orders for November are expected to show a pick up after October’s sharp fall to -23. It is anticipated that we should see an improvement to -19.

EURUSD – the euro continues to be well bought on dips, yesterday rebounding from 1.2735 and falling short of 1.2710 trend line support from the 1.2050 lows. 1.2605 remains the next support below that being 50% retracement of the 1.2045/1.3170 up move.
Today’s break above 1.2840 trend line resistance from the 1.3150 highs targets the 1.2920 area and 50 day MA.. The current rebound needs to overcome the 1.2920 level to stabilise and target 1.3000.

GBPUSD – yesterday’s dip to 1.5880 saw the pound gradually rebound towards the 1.5960 area. We need to hold above the 1.5960 area to really push on towards 1.6050.
To push conclusively lower we would need to see a move towards and break below 1.5800 trend line support from the 1.5270 lows as well as 1.5660.

EURGBP – the price action continues to compress in a corridor between support at 0.8000 and resistance just below the 200 day MA and last week’s highs above 0.8065.
Only a move beyond the 0.8080 level has the potential to retarget the October highs at 0.8165.
On the downside trend line support comes in at 0.7989 from the July lows at 0.7755.

USDJPY – the break of 81.80 area now opens up the possibility of a move towards the March highs above 84.00. We need to stay above 81.80 to reinforce this scenario. Last weeks break above the weekly cloud for the first time since April, looks like the catalyst for further strong gains.
The 80.60 level should now act as support; otherwise we’ll end up heading back towards the November lows at 79.00.