Europe to open lower after another weak US finish

As we move into day 4 of the US government shutdown, the reality of the situation finally appears to be registering with investors that a quick solution may still be some way off, though we did see a late pullback from the lows of the day on talk that Republican House leader John Boehner was determined to do all he could to avert a government default.

There was some suggestion that he might be prepared to push a bill through to end the budget deadlock and raise the debt ceiling with the help from the moderates within his own party and all the Democrats in the chamber, in defiance of the majority of his party, though it seems that this would probably only happen much nearer the October 17th deadline.

For now markets aren’t pricing in the unexpected, because if they were, you would have to think that stock markets would be a lot lower, and gold would be higher. The longer the impasse goes on the more likely this current stock market weakness could start to accelerate.

As it is some economic indicators are starting to show some worrying weakness, with yesterday’s ISM services number for September coming in below expectations.

With no September jobs report today, due to the shutdown, and a rather disappointing September ADP report earlier this week at 166k, concerns about the US economy are growing, making it much less likely that we will see the start of any Fed tapering this year.

After all with no data to analyse, as well as adjustments in the coming months to compensate for the disruption it will be much harder for the central bank to arrive at any meaningful conclusions as to the state of the US economy, as well as the extent of any damage the shutdown has done to it.

We may get some clues on the central banks thinking on this today when 5 Fed members including Richard Fisher and Bill Dudley are due to give speeches on various aspects of the economy.

In Europe we look set to see a lower open now that events in Italy appear to have settled down for now and the troika last night gave the progress of Portugal’s fiscal program the thumbs up, saying the program was on track.

The Portuguese government was unable to get the troika to relax its 4% budget deficit target for next year, meaning that more spending cuts are likely to the tune of €4bn, which is likely to be announced in the coming weeks.

In Italy we are also set to find out whether our old friend Mr Berlusconi will be expelled from the Italian parliament, and despite PM Letta’s confidence victory on Wednesday Italy’s prospects don’t look that much brighter given comments from ratings agency Moody’s yesterday suggested that another downgrade could be on the cards, due to the fragile government, and the inability to govern effectively or meet its EU deficit targets.

EURUSD – the move above 1.3600 keeps the possibility of a move towards 1.3710 on the table. If we break above these highs then 1.4000 could be a possibility. A break below the 1.3450/60 area which acted as support last week would signal a move towards the 1.3320/30 level.

GBPUSD – the risk that the recent sterling rally is losing its legs appears to be building after yesterday’s bearish daily candle. A break through 1.6150 could well see further falls towards the 1.5980, which was the launch pad for the move through 1.6000. There remains significant resistance through 1.6300 with trend line resistance at 1.6330 from the 2009 highs at 1.7045 as well as the highs this year at 1.6370 big chart points. 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 1.5850 from the 1.4815 lows.

EURGBP – this week’s sharp rebound off 0.8330 and push through downtrend resistance at 0.8400 appears to have opened up a deeper correction towards the 0.8470 area, where we have down trend line resistance from the 0.8760 highs. The expectation is still to see a move towards 0.8280, but we need stay below the 0.8500 and the 200 day MA.

USDJPY – the US dollar continues to drift lower and the break below the trend line support at 97.65 from the June lows at 93.85, as well as the daily Ichimoku cloud support of the past two weeks suggests the potential for further weakness towards the 94.00 area. We need to see a move above trend line resistance at 98.40 from the highs two weeks ago at 100.60 to stabilize and retarget the 100.00 area.

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