Global stock indices tumbled yesterday, following data suggesting that the US manufacturing hit a decade low in September, increasing fears of a steep economic slowdown in Q3. In the UK, PM Boris Johnson is set to unveil a final Brexit Plan in his closing speech at the Conservatives annual conference, but according to leaks and headlines, the offer may be already dead on delivery.
The dollar traded lower against most of the other G10 currencies on Tuesday and during the Asian morning Wednesday. It gained somewhat only against NOK, AUD, SEK and GBP, while it lost the most ground versus CHF, EUR and JPY.
The strengthening of the safe-havens yen and franc suggests that risk appetite was hurt yesterday and indeed, that was the case. Major stock indices were a sea of red, with the negative sentiment rolling into the Asian session today. Both Japan’s Nikkei 225 and China’s Shanghai Composite slid 0.49% and 0.92% respectively.
The main driver behind the risk-off environment was data suggesting that the US manufacturing activity fell to a 10-year low in September as the prolonged trade conflict between the US and China weighed on US exports, adding to fears of further economic slowdown during the third quarter. Specifically, the ISM manufacturing PMI slid further below the boom-or-bust zone of 50, to 47.8 from 49.1, missing expectations of a rebound to 50.4.
At its latest meeting, the FOMC decided to lower interest rates by 25bps, but the new “dot plot” pointed to no more cuts this year and the next. That said, despite the 2019 median dot suggesting that there are no more rate reductions on the table, the Committee was largely divided, with only 5 members supporting that view. Seven still believed that another quarter-point reduction may be appropriate, while the remaining 5 argued that the last cut was not needed.
The market remained convinced that another quarter-point reduction may be served by December, and the disappointment in the ISM may have prompted participants to add to those bets. Today, they even assign a 63% probability for another cut to be delivered at the next meeting, scheduled for October 29th-30th. What could drive that percentage higher may be a disappointing employment report on Friday. We may get a hint on how the labor market may have performed during September from today’s ADP report. That said, we repeat for the umpteenth time that the ADP number is far from a reliable predictor to the NFP print. Even last time, when the ADP rose to 195k from 142k, the NFP slid to 130k from 159k. Taking into account at-the-time-of-the-release data (no revisions are considered) from January 2011, the correlation between the two time-series stands at 0.45%. Just for the record, the ADP employment report is forecast to show that the private sector has added 140k jobs last month, less than the 195k gain in August.
Yesterday, the Dow Jones Industrial Average index sold off heavily and fell below the 200 EMA on the 4-hour chart and its key support area, at 26700. Initially, the cash index was trying to move higher, as it was above the 27000 mark, but once the disappointing US ISM manufacturing number was announced, the price of DJIA fell sharply. Unless the price is able to get back above the 26700 barrier, or the 200 EMA, we will stay bearish for now.
Even if DJIA moves back up a bit, the focus will fall on the 26700 zone, which previously acted as a good support area and now may take the role of potential resistance barrier. If it holds the index, the bears could re-enter the field and drive the price down again, possibly bypassing the 26550 hurdle, marked by the high of August 30th and yesterday’s low, and targeting the 26365 zone. That zone was seen acting as a good resistance on September 2nd and 4th. Slightly below that lies another possible support area, at 26240, which is marked by an intraday swing low of September 4th.
Alternatively, a strong push back above the previously-mentioned 26700 barrier and the 200 EMA could invite the buyers back into the game and there might be a chance to some more upside. In addition to that, if the price rises above the 26835 hurdle, which is the inside swing low of September 30th, this may open the door for a further move north. Such a move might bring the index to the 27070 obstacle, which initially may stall the price, or even force it to correct a bit down. That said, if the bulls manage to maintain DJIA above the 26835 territory, this could initiate another round of buying, potentially bringing the index above the 27070 barrier and aiming for the 27180 hurdle, or even the 27315 level, marked near the highs of September 12th and 13th.
Moving from the US to the UK, yesterday, the daily Telegraph reported that Boris Johnson will propose a final Brexit plan to the EU, with some details being leaked later in the day. According to the reports, Johnson wants the UK out of both the single market and customs union in 2021, with Northern Ireland staying inside the single market for four additional years. Then, Northern Ireland would have to decide whether they want to remain aligned to the EU or return to British rules. The Prime Minister will present his plan in his closing speech of the Conservative annual conference today, and if it is in line with the leaks, there is a strong case to not be accepted by the EU. The Irish foreign minister has already said that his government will not be signing up on a voluntary basis to border checks, which suggests that the plan may face the opposition of other member states as well.
This will bring us back to square one, with Johnson staying adamant that he will take the UK out of the EU by October 31st, with or without a deal, and Parliament trying to figure out more concreate ways of stopping him. Even if he eventually bows and decides to ask for a delay, as the new law requires him, yet, the risk of a no-deal Brexit on October 31st will not be totally off the table. For a new extension to take flesh, consent from all EU members is needed, something that it is not a given at the moment. Thus, with the clock ticking towards the current deadline, the pound may be poised to continue drifting south, unless the two sides manage to find consensus, either by agreeing on a middle-ground deal, or by agreeing to a new Brexit extension.
From around the end of September, GBP/JPY keeps on sliding, while trading below a short-term downside resistance line taken from the high of September 20th. Although the pair is still below its downside line, yesterday, after a strong sell-off, the rate failed to move further away from its 200 EMA on the 4-hour chart and quickly got back to it. Also, if we take a look at August and the beginning-of-September price action, we can see that the pair failed to move below the 126.55 mark and formed a double bottom. If this current slide from the end of September is be seen as a temporary correction, then we could see another leg of buying soon. That said, in order to consider such a scenario, a break of the above-mentioned downside line is required, hence why we will stay neutral for now.
If GBP/JPY continues to respect the aforementioned downside line, we could see a further slide, especially if the rate falls below yesterday’s low, at 131.76. This way, the pair would confirm a forthcoming lower low and it may drift towards the 130.80 hurdle, marked by the low of September 9th. GBP/JPY could stall around there, or even correct back up a bit. But if it continues to trade below the downside line, the bears might take charge again and lead the pair below the 130.80 obstacle and aim for the 129.95 level, marked near the low of September 5th.
On the other hand, if the previously-discussed downside line surrenders and the rate climbs above the 133.35 barrier, marked near yesterday’s high, this could attract more buyers and set the stage for a possible move to the 134.00 obstacle, a break of which could send GBP/JPY to the 134.61 level. That level is marked by the high of September 24th.
Apart from the US ADP report, we also get the UK construction PMI for September, and the EIA (Energy Information Administration) weekly report on crude oil inventories. With regards to the UK PMI, the forecast suggests that the index remained unchanged at 45.0. However, bearing in mind that the manufacturing index rebounded somewhat yesterday, we see the risks surrounding the construction forecast as tilted somewhat to the upside. In any case, we don’t expect the UK PMIs to be a game changer for the pound. We still expect the currency to stay hostage to developments surrounding the Brexit landscape. With regards to the US EIA report, it is expected to show a 1.567mn barrels inventory build, less than the prior 2.412mn. That said, the API (American Petroleum Institute) unveiled a 5.920mn barrels slide, which tilts the risks of the EIA forecast to the downside.
As for the speakers, we have two on today’s agenda: Philadelphia Fed President Patrick Harker and New York Fed President John Williams.
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