Despite yesterday’s negative finish on US markets we still ended the month significantly higher and while this week’s Fed meeting didn’t rule out a taper in December it didn’t rule it in either.
There have been worrying signs that the current equity market rally might be on the verge of running out of steam given renewed uncertainty about the near term direction of Fed policy, as well as a continued deterioration of economic data across Europe, which has seen the euro plunge in the last 24 hours in anticipation of a possible ECB rate cut next week.
This seems unlikely but hasn’t stopped market speculation of just such an event.
There was some positive news overnight with this morning’s Chinese manufacturing PMI which has assuaged some concerns about a slowdown in the recent rebound in Chinese economic activity. October manufacturing PMI came in slightly better than expected at 51.4 on the official measure and at 50.9 on the HSBC measure, suggesting that the recent softness in Chinese data may well have bottomed out.
In spite of concerns about the timing of a Fed taper, the outside prospect of one in December received a boost with an absolutely stunning Chicago PMI number for October. Not only was the headline number strong, but the new orders and employment components were strong as well, causing some degree of head scratching given how out of kilter the numbers appeared to be with other economic indicators.
We should discover how much of an outlier the Chicago number was later today with the release of the October manufacturing ISM numbers, which are expected to come in slightly weaker from the 56.2 in September at 55.1.
While today’s economic data remains important in the context of the damage done to the US economy caused by the government shutdown, today’s speech by St. Louis Fed head James Bullard is equally important, and will be closely scrutinised for any clues as to the Fed’s thinking with respect to this weeks surprisingly neutral statement on the state of the US economy.
Mr Bullard’s speech, which is on monetary policy, is doubly important given how markets reacted to his comments 2 days after the September meeting when he stated that the decision not to taper was a close call, and could have gone either way.
Today’s speech could well offer important clues as to the direction of the Feds thinking when it comes to the timing of any taper, as well as the reasons as to why there was no mention of the government shutdown in the Fed statement.
As for the UK, which remains the best performing economy in Europe, the start of Q4 is set to see the latest manufacturing PMI for October, and this is expected to come in slightly below the September number of 56.7, at 56.4, still firmly in expansion territory. There is however a significant divergence in respect of this data, and the official ONS data, and this remains one area where there remains a lot of uncertainty as to the true picture surrounding the manufacturing sector.
What isn’t in doubt though is that the sector remains at least 10% below its peak levels seen in 2008, and it is important that the sector continues to remain strong if the UK economy is able to rebalance away from its reliance on the services sector.
EURUSD – after spending about a week trying to push above 1.3800 and failing the euro finally succumbed to a sharp down move, posting its biggest one day fall in over a year, and having broken below 1.3710 and the lows last week looks set to close in on the 1.3450 area. The speed of the down move also suggests we could well have seen the top in the short to medium term with a bearish weekly close suggesting we could well see a move towards 1.3200 in the coming weeks.
GBPUSD – while below the 1.6110 level the bias remains for a move towards 1.5900, where we have the reaction low to a possible double top reversal pattern, from the highs at 1.6260. A break below 1.5900 has the potential to target a move towards 1.5750. For this to unfold though we would first of all, need to push below the 1.6000 level.
EURGBP – yesterday’s move lower took out the lows for the last 7 days and brought us back to thhe 0.8470 area. Having dropped as sharply as we have any rallies could find resistance at the 0.8520 area, which needs to hold for a move back towards the 0.8420 area.
USDJPY – the US dollar continues to find dips well sought after with the main obstacle to a move higher sitting at 99.20 and trend line resistance from the 103.75 highs in May this year.
Support remains just below the 200 day MA at 97.45 at 97.20 trend line support from the 25th Feb lows.
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