[B]Eurozone PMIs and UK GDP in focus on Thursday[/B]
Today’s UK opening call will provide an update on:
• Chinese manufacturing falls back into contraction territory for the first time since September;
• Eurozone manufacturing and services PMIs in focus on Thursday;
• UK first quarter GDP figure potentially facing downward revision;
• Strong US data could mark an end to the rally in the stock markets.
European stock indices are expected to open more than 1% lower this morning, after data showed China’s manufacturing sector fell into contraction territory in May, following months of slowing growth.
The HSBC manufacturing PMI released over night came in well below expectations at 49.6, raising further doubts about the recovery seen in China over the last six months. Falling demand in the eurozone and the US is clearly having a major impact on Chinese exports, which is in turn, weighing on the manufacturing sector. The figure is also going to raise doubts about whether domestic demand can take up the slack from the rapidly falling external demand for Chinese exports. Recent data suggests it can’t, which is a big worry for Chinese growth going forward.
A lot of attention will now be paid to the flash manufacturing and services PMIs out of the eurozone this morning. These figures have been extremely disappointing for quite a while now and are showing little sign of improvement.
We’re expecting only a marginal improvement in these figures in May, which is likely to lead for further calls for a rate cut from the ECB next month. All except the German services PMI are expected to remain deep in contraction territory, leaving little chance of growth in the near future.
The eurozone consumer confidence figure for May isn’t going to be much better. We’re expecting another slight improvement here, to -21.8, but this is still well below the level that separates optimism from pessimism. It’s no surprise though that this figure is so deep into negative territory, given the incredibly high levels of unemployment in the euro area, not to mention the fact that many countries are stuck in a deep recession.
The first revision of the UK Q1 GDP figure will be watched closely this morning, after the initial estimate caught the markets off-guard last month, coming in well above expectations. Forecasts were originally for marginal growth at best, and given the other data seen in the first quarter, I wouldn’t be surprised to see this figure revised lower this morning.
In the US there’s a large amount of data out on Thursday, which should create some volatility in the markets. Especially now that the Fed is considering scaling back its purchases, potentially over the next few months, as confirmed by Fed Chairman Ben Bernanke yesterday.
The interesting thing on Thursday will be the reaction to the data on the markets. What we could now see, following Bernanke’s comments yesterday, is positive data weighing on stocks and poor data contributing to the rally. If we continue to see an improvement in the weeks ahead, this could mark the end of the rally.
US weekly jobless claims are expected to fall back below 350,000 today, following a spike in the figure last week which saw it hit 360,000. If the figure does fall back below 350,000 today, it would suggest that last weeks’ figure was just a blip in the data. We could also see a downward revision to the figure which would suggest that the labour market is still holding strong.
The reaction to this figure will be the first test of how investors are likely to react in the coming months. If we see a figure below 350,000, accompanied by a downward revision to last weeks’ number, it would point to an ongoing improvement in the labour market, which could therefore prompt a sell-off in equity markets and buying in the dollar.
Another miss could suggest that we are seeing weakness once again in the labour market and companies are not as optimistic as first thought, and are therefore starting to lay people off. However, this could help push stocks higher as it would suggest that we haven’t seen the permanent improvement in the labour market that the Fed is looking for before it begins tapering its asset purchases.
Finally today, we also have the US manufacturing PMI for May, which is expected to have fallen to 51.8. This figure has been gradually falling since the start of the year and is getting dangerously close to the 50 level that separates growth from contraction. On a brighter note, housing data is expected to remain strong in April, with new home sales rising to 425,000, up around 8,000 from the month before.
[B]EURUSD[/B]
We saw some huge moves in this pair yesterday, particularly during Ben Bernanke’s testimony, when he first suggested that the Fed would continue with the current level of asset purchases, before confirming they could be tapered in the next few months. Bernanke aside, we saw a great example yesterday of the huge role that technicals play in all of this, with the pair bouncing off the 50 fib level, almost exactly to the pip, before crashing back to trade below 1.2850. The 50 fib level was always going to be a major resistance level, with 1.30 being a key psychological level for the pair, but also the fact that on that daily chart, it coincided with where the 200-day SMA crosses the middle bollinger band. We should now see another assault on the neckline of the head and shoulders on the weekly chart, around 1.28. A break below here would be extremely bearish for the pair, prompting a move back towards 1.18, based on the size of the formation.
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[B]GBPUSD[/B]
We saw dollar gains across the board yesterday, including in the cable pair, although this did find strong support just above 1.50, a key resistance area. As highlighted yesterday, this is going to be a major support level for the pair. If this level is broken, it should prompt a move back towards this years’ lows of 1.4830, with the next target after that being 1.44. With the Fed now threatening to pull the plug on QE, I only see the dollar getting stronger in the longer term. As a result, I’m even more bearish on this pair than I was before. We’re seeing a little bit of consolidation at the moment around that 1.50 level, however I don’t expect it to hold for long. The consolidation could lead to a flag formation, but in my view that will only delay the inevitable break of this level. If we do see a break in this level, then the pair should find support below here around 1.4980, 1.4940 and 1.49.
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[B]USDJPY[/B]
Yesterday’s rally in the dollar saw the pair make further strides in its move towards the next major target of 105.57, the 61.8 fib level of the move from June 2007 highs to October 2011 lows. The initial target of 103.75, a previous level of support, was hit yesterday and is now providing strong resistance for the pair. Now we’re seeing a retracement, which could see the pair come back to test that key 100 level as a new area of support. The fib levels, particularly the 50 and 61.8 levels, tend to give a good indication of where the pair will pull back to and as you can see on the 4-hour charts, 100 falls between these two levels. Before we see that though, we’ll need to see a close below 102, a previous level of support and resistance, which is currently providing support for the pair. Below here the pair should find additional support between 101.25, a previous level of support, and 101.15, the 38.2 fib level.
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Ahead of the open we expect to see…
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