European markets look set to open higher on Wednesday, mirroring the positive finish on Wall Street ahead of the release of industrial production data from Germany and the UK. The FTSE 100 is seen opening 11 points (or 0.16%) higher with homebuilders a likely focus as Ashtead (LON:AHT) and Barratt Developments (LON:BDEV) report results and BOE governor Mark Carney speaks to parliament.
US stocks ended Tuesday higher, with the NASDAQ posting a fresh record closing high despite a wobble following shockingly weak ISM data. The ISM non-manufacturing index, back at a 6-year low, was offset by M&A optimism with Spectra Energy (NYSE:SE) being bought by Enbridge (NYSE:ENB) for $28bn.
GBP/USD and EUR/USD shot through 1.34 and 1.12 respectively following the ISM data release, which implies 1% GDP growth for the US in the third quarter. In the context of manufacturing contraction and a huge service sector slowdown it would be a policy error for the Fed to hike interest rates in September.
Nonetheless, the Fed’s Williams has said it "makes sense to get back to a pace of gradual rate increases, preferably sooner rather than later" in pre-prepared remarks on Tuesday after the ISM data was released. Until Fed speakers confirm that they are interpreting the US economic slowdown in August as a reason to tread carefully in tightening monetary policy, US stocks could come under pressure. The Fed releases its Beige Book later today.
The euro soared on Tuesday despite a much slower than expected rise in German factory orders. Today is expected to see German industrial production rise at 0.2% m/m in July, down from the 0.8% growth seen in June.
UK industrial production is forecast to dip -0.2% in July with a -0.5% fall in manufacturing production. It was July that saw a sharp slide in the manufacturing PMI. It’s entirely feasible that the real economy never matched the nerves felt by purchasing managers and that today’s figures see a monthly rise.
BOE Mark Carney may be hoping for disappointing industrial data today to help justify the Bank of England’s swift, but probably unnecessary decision to ease monetary policy in his hearing with parliament today. One of Mr Carney’s biggest detractors Jacob Rees Mogg has said “Once you don’t trust him to be impartial, you begin to think that all his actions have a political spin to them and therefore people make the criticism that he cut rates in a panic to prove himself right.”
Data aside, Mark Carney is likely to take a downbeat tone in defence of cutting interest rates and renewing bond-buying. He may even go so far as to suggest further easing may be needed in the coming months, which would be bearish for the British pound as cable comes close to its highest level since the days following the referendum result.
Also of note is China’s release of its FX reserves at the end of August. Indicators point towards a slight decline in August, though largely stable in the context of the sharp decline at the start of the year. The PBoC may have been more active in markets in the lead up to the G20 held in China so there is a chance yuan-bears may have another go in September, forcing a bigger drawdown of reserves.
EURUSD – There was no downside break of 1.1130, instead support held and there was a topside break of 1.1245. Next potential resistance from 1.1340 then 1.1365 with 1.12 then 1.1130 as possible support.
GBPUSD – In a strong bullish sign, cable broke above the bearish daily shooting star from 1.3370, the August 3 swing high. Possible resistance at 1.3480 with 1.3370 now immediate possible support.
EURGBP – The euro Sterling pair has found some support with another daily hammer pattern at 0.8340, suggesting a bounce towards possible resistance at 0.8485. A break lower could find support at 0.8250.
USDJPY – Dollar yen has pulled back beneath its long term trendline and the daily swing low at 102.80, negating the upside breakout. Next potential support at 101.80 then 101 with 102.80 now possible resistance.
Equity market calls
FTSE100: to open 11 points higher at 6,837
DAX: to open 7 points higher at 10,694
CAC40: to open 7 points higher at 4,536
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