It looks like it is politics that are once again driving what equity markets are doing, and this time it is US politicians who are unsettling markets with their unerring capability of turning a drama into a crisis.
We saw this play out in 2011 and it looks like history is repeating itself as continued political bickering over the raising of the debt ceiling is understandably making investors nervous in what is becoming a classic case of déjà vu.
Only this time it is ratings agency Moody’s who warned a couple of days ago that a government shutdown could well be considered a credit negative event.
Moody’s currently has the US on a triple “A” rating with stable outlook, unlike Fitch who have a negative outlook and S&P who have them on the next rating down after the debt ceiling debacle in August 2011.
Given that neither President Obama nor the Republicans seem in any mood to give ground investors appear to be voting with their feet, and pulling money off the table as US markets closed lower for the fifth successive day, and in so doing closed the gap higher, that we saw after the news that Larry Summers had pulled out of the running to replace Ben Bernanke as chairman of the Federal Reserve.
This uncertainty, while it is bleeding into European markets it is only doing so marginally, lending a slightly softer bias to proceedings, but without ever threatening to tip them sharply lower. We do still expect to see a slightly softer open, though the German Dax might be the exception to that.
Nevertheless it is yet one more reason along with Fed tapering concerns for investors to tread carefully.
In economic data due out today we aren’t expecting much in the way of surprises from the final revision of UK Q2 GDP which is estimated to remain unchanged at 0.7% on the quarter and 1.5% year on year.
Following on from that we also have the final Q2 US GDP figures and these are expected to be revised higher from 2.5% to 2.6%. These numbers aren’t expected to tell us anything we don’t already know about the US economy, as there is much more concern about how Q3 is doing and it is not doing anywhere near as well as Q2. Yesterday’s durable goods numbers for August did show a rise, but when transportation was stripped out they were disappointing.
Weekly jobless claims continue to give a positive view on the US labour market while all other indicators don’t. That latest claims numbers are expected to show an increase from 309k to 325k.
Pending home sales are expected to slip back 1% in August, a slight improvement on the 1.3% decline, but this would be further evidence that higher mortgage rates could be having a dampening effect on the US housing market, though new home sales are doing better.
EURUSD – having so far held above the 1.3420 area then a retest of last week’s high remains possible, and then on to 1.3710. Only below the 1.3420 area, argues for a retest of the lows last week at 1.3320.
GBPUSD – while we stay above the 1.5980 area then a retest of last week’s highs and then 1.6310 remains possible. The risk is that a sustained break below 1.5980 could suggest a move towards the lows last week at 1.5880 and the medium up trend support now comes in at 1.5755 from the 1.4815 lows.
EURGBP – while below the 0.8470 area the risk remains towards the downside and a test of the 0.8280 area, the 50% retracement of the 0.7755/0.8815 up move. A move back below the 0.8390 area would suggest that this move could be about to unfold. To stabilise we need to see a move above the 0.8500 area and the 200 day MA.
USDJPY – while US treasury yields remain soft, the US dollar will struggle to rally strongly. While below the 100.00 level the risk remains for a retest of the trend line support at 97.70 from the June lows at 93.85, as well as the daily Ichimoku cloud support last week. Only a move below this trend line suggests further losses towards the 94.00 area. We need to see a move above the highs two weeks ago at 100.60 to retarget the 103.70 area.
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