LCG: Soft PMI could send FTSE below 7400p, despite cheap pound.

October 1, 2019

Global equities are better bid after the US officially rejected the latest news about leaving the Chinese stocks out of the American exchanges.

Japanese equities followed up on a positive New York session. Tankan manufacturing index declined from 7 to 5 in the third quarter, significantly less than 1 expected by analysts, as the manufacturing outlook deteriorated slower than feared. But capital expenditure across all industries fell from 7.4% to 6.6%, versus 7% penciled in by analysts. Soft, but not catastrophic data, spurred expectations that the Bank of Japan (BoJ) would announce additional stimulus by the end of this month. The yen cheapened to 108.23 against the US dollar, giving a better spin to the Japanese exporters. Carmakers mostly gained.

China and Hong Kong markets are closed due to the Chinese Communist Party’s 70th anniversary celebrations, but investors keep an eye on Hong Kong, where festivities could turn into a tragedy with worsening anti-China bellyache. The worse scenarios are already factored in the market prices, hence, leaving the most-feared October 1st behind should give a short-term relief to investors when the trading resumes. Yet, the long-term structural risks in Hong Kong, such as the threat of losing its special status, will likely remain the major barrier to a broader-term recovery.

Gold crushed to $1462 an ounce on the back of a rapid unwind of speculative long positions.

USD extends gains, euro and pound crush under the pressure of weak data, muddy politics

The US dollar extended gains against all G10 currencies. The US dollar index advanced to the highest level since May 2017 and is expected to make an attempt above the 100-handle shortly, as its major counterparts collapse on weakening economic fundamentals, political shenanigans and increasingly dovish central bank expectations.

The euro-dollar endured a sharp fall on stops as it slipped below the 1.09 mark, after inflation in Germany eased from 1.4% to 1.2% y-o-y in September versus 1.3% expected by analysts. Due today, the final PMI read should confirm the shocking contraction (41.4) in German manufacturing activity in September. But no significant price action is expected after the release today, given that the weak data is already factored in the market prices.

The DAX closed 0.38% up on Monday and is set for a positive start on Tuesday.

European investors will rather concentrate on September inflation estimates. The Eurozone core inflation estimate may hint at a slight improvement from 0.9% to 1.0% in September. If not, the euro should be tempted to extend losses below the 1.09 mark. An advance past the 1.09 level should meet a decent resistance near 1.0938 (minor 23.6% Fibonacci retracement on September 13-30 debasement) and 1.0970 (major 38.2% retrace).

Across the Channel, the pound continues feeling the pinch of messy politics and chaotic Brexit debates within Parliament. The economic growth contracted by 0.2% in the second quarter, the biggest retreat since the last quarter of 2012, as businesses disinvested 1.4% mostly due to the Brexit unknowns. The current account deficit didn’t narrow below 20 billion pound as expected, either. Plus, the last release was revised up to 33 billion from 30 billion pounds. Apparently, a softer pound didn’t have a full magic effect on Britain’s deficit due to… the Brexit uncertainties.

As a result, cheaper pound didn’t translate into an improved appetite in Britain’s blue chips on Monday, as investors lost their enthusiasm following the discouraging GDP and current account prints.

Still, the FTSE 100 held ground above the 7400p handle and is expected to open 20 points stronger at 7428p on Tuesday. Though, gains could be vulnerable to the release of additional bad data today.

A weak PMI read this morning could point at a faster contraction in the manufacturing activity in September, further spoil the investor mood and send the FTSE below the 7400p support despite the cheapening pound.

Speaking of Brexit, the UK government has finalized the legal text of a proposed Brexit, which will be presented to the EU on Thursday. The Irish border remains the most intricate part of the puzzle, as the UK wants to gradually exit the Irish backstop according a person familiar with the matter, but Europeans don’t.

In the meantime, the oppositions party members are trying to agree on an alternative government plan and to oust Boris Johnson. The leading risk here is, if they fail to agree among themselves, Johnson could throw the snap election he wants before the Brexit deadline and somehow manage to get the country out of the EU by October 31st, probably without a deal. With the risks comfortably tilted to the downside, a further fall in pound is almost inevitable. Presently, Cable tests 1.2272, the 50% Fibonacci retracement on September rebound. A move below this level should encourage a further slump toward 1.2198 (major 61.8% retracement) and bring the 1.20 level back to the table.

Opening calls

FTSE to open 20 points higher at 7428

DAX to open 52 points higher at 12480