In the absence of US markets yesterday, European markets failed to make gains as the early lift from a rally in Asia spurred by the China stimulus faded, despite basic resources outperforming. It appears that the European day’s late weakness will persist this morning.
China’s market influence and Expectation on Fed to hold rates
After a surge in China house sales in two important Chinese cities assisted in driving the Hang Seng to 3-week highs, the day got off to a good start as Asian markets surged on evidence that China’s recent stimulus measures were aiding in boosting the real estate industry. This came after a positive US employment report on Friday, which strengthened the case for the Federal Reserve’s ability to maintain rates at their meeting later this month.
U.S. Comeback
After the RBA left Australian interest rates unchanged at 4.10% earlier this morning and the most recent Chinese Caixin services PMI retreated to its weakest level of the year at 51.8, the return of US markets following yesterday’s Labour Day holiday should provide a little more depth to today’s price action in Europe. Today’s focus is expected to be on the services PMIs for August.
RBA’s hold
There were no surprises in the RBA’s decision to leave interest rates unchanged for a third consecutive time. The central bank maintains that inflation is still too high and that it won’t be until late 2025 before prices return to the target range of 2-3%.
Strength of services
It has been interesting that services PMIs on both sides of the Atlantic have, for the majority of this year, been able to counteract the weakening in manufacturing by maintaining their respective economies.
With pricing and other related expenses proving to be considerably stickier than other sections of the economy as a result of high levels of employment and tight labour markets, the strength of the services sector has been a significant driver behind the hawkishness of central banks in their efforts to restrain inflation.
The August flash PMIs from Germany and France showed a steep decline in economic activity, adding to mounting indications over the past few months that this trend has begun to change.
Consequence
Italy and Spain are expected to exhibit a similar slowdown, but given the size of their tourism sectors, they should be able to avoid a contraction. Italy is predicted to slow to 50.4 and Spain to 51.5 in August as a result of this weakness.
ECB’s decision
Even if August inflation witnessed an unwanted nudge higher, today’s statistics may be the deciding factor in whether the ECB decides to suspend its rate hike cycle.
The fact that PPI has been in negative territory on a year-over-year basis for the past three months and is expected to continue to decline into deflation territory in July further complicates the situation for the ECB. We may anticipate a monthly loss of -0.6%, which would be the seventh consecutive monthly decline. Prices are predicted to decrease by -7.6% annually.
In terms of the PMI, it is anticipated that the UK services sector will show a decline to 48.7 from 51.5 in June, indicating that rising prices are now beginning to restrain consumer spending.
Rates of currency pairs
- The EUR/USD pair is now trading above both the trend line from the March lows and the lows from August, which are located in the range of 1.0760/70. A advance towards the 1.0630 level might be enabled by a breach of the 1.0750 region. Resistance is still there at the previous week’s highs of 1.0945.
- GBP/USD – After failing to move above the 1.2750 region last week, the pair is currently holding above the support around the August lows at 1.2545. To reduce downside risk, we must push back through the 1.2800 zone; otherwise, a break below 1.2530 might trigger a move below 1.2400.
- The bias for the EUR/GBP pair is still towards a return to the August lows near 0.8500 while staying below the 0.8620/30 region, where we failed last week. The 50-day SMA serves as another point of resistance, and below it, the tendency is still to sell into rallies.
- USD/JPY – After finding support at the 144.50 area on Friday, the bias remains for a return to the 147.50 area.
- The FTSE100 is anticipated to open 22 points lower at 7,430, the DAX is anticipated to open 34 points lower at 15,790, and the CAC40 is anticipated to open 12 points lower at 7,267.
In conclusion
European markets had a difficult day due to waning hope from China’s stimulus and worries about the state of the world economy. The performance change in the services sector, especially in Germany and France, casts doubt on the ECB’s intentions to increase interest rates. As central banks struggle with inflationary pressures and economic slowdowns, market investors are keenly monitoring important economic data.