Major economies have showed us yesterday, that their service sectors are facing bigger problems ahead, if the numbers continue to slide. Some individual EU states, like the UK and Sweden, are already in contraction territory, which may escalate further. US gets a green light to impose tariffs on some EU goods. US employment numbers take centre stage today.
The Global Service Sector Is Sliding
Yesterday, the economic calendar was filled with service PMI numbers, coming out from various major economies. Countries like Australia, Sweden, Spain, France, Germany and the UK showed figures not only below the previous readings, but also below their forecasts. The eurozone as whole also did not make situation better, as the number came out, at 51.6, which was slightly below expectation at 52.0 and well below the previous figure, at 53.5. Certainly, that is still not the contraction territory, but the European equities did feel the heat during their trading sessions. But the European bourses closed mixed. After the release of the US Services PMI number and the US ISM Non-manufacturing PMI figure (which were released before the European closing bells), initially, the equity markets took another dive, but were quick to recover after that. The services figure was the same as expected, at 50.9, but the ISM non-manufacturing PMI was below forecast, at 52.6 against 55.0, this has raised the probability for the Fed to step in again with more rate cuts. At the time of writing, the probability for another 25bps-point rate cut during the next Fed meeting in the end of October, sits at around 88%. If so, this would bring the US interest rates into the range between +1.50% and +1.75%. Also, for now, some market participants see another possible cut by 25bps in December’s meeting as well. Potentially placing the rates into the +1.25 — +1.50% range. That probability currently sits at around 50%.
The US dollar plunged after the ISM numbers, allowing other major currencies to strengthen against it. Closer to end of the US trading session, the greenback managed to recover some of its losses, but still ended up being lower than its counterparts. It only managed gain slightly against the Canadian dollar and the Swiss Franc.
US Tariffs On EU Goods
Another piece of news that is worth mentioning was that, late Wednesday, the US had received a green light from the World Trade Organisation to impose tariffs on European countries, which are included in the Airbus consortium. Countries like France, Germany, Spain and the UK will have a basket of their exported goods falling under the new US tariffs of 25%. Goods like French wine, Spanish olives, Scottish whiskey will fall under that category. All this is because WTO found that major European countries were giving huge subsidies to Airbus, in order to be able to compete with its major rival — Boeing. But Airbus was not alone in receiving favours, as Boeing was also caught accepting large subsidies from the US, as the World Trade Organisation has found. The court ruling of that is expected next spring. That said, the EU is already getting their own tariffs ready against US imports, in order to retaliate against the US ones. No doubt that such actions do not help both of the sides, as the first ones to get hit will be businesses, who will also pass on some of the cost to their consumers. Such a situation could keep the equity markets under a lot of pressure, which may lead to further declines.
Nasdaq100 — Technical Outlook
Looking at the technical picture on the Nasdaq 100 cash index, after failing to move above the 7822 level on October 1st, the price fell sharply, forming another lower high, through which we can now draw a short-term tentative downside resistance line taken from the high of September 19th. Nasdaq 100 drifted further down, broke below its short-term tentative upside support line taken from the low of August 6th, tested the 7460 zone, reversed sharply back up after the ISM numbers release and travelled back above the same upside line. For now, we will stay neutral in the very short run and wait for a clear breakout through one of our key levels first, before examining a further directional move
In order for us to start looking at the downside again, a drop back below the aforementioned upside line is required. In addition to that, a break below the 7577 hurdle, marked by an intraday swing high of October 2nd could help attract more sellers into the game. This is when we will aim for yesterday’s low, at 7460, a break of which would confirm a forthcoming lower low and could clear the path to the 7380 level, marked near the lows of August 7th, 15th and 26th.
Alternatively, for us to get comfortable with the upside, we will wait for a clear break and a daily close above the previously-discussed downside line. But if the index rises above the 7822 barrier, which is the high of October 1st, this might push the price further north, as more buyers could be joining the game. The next possible resistance could be seen around 7880 obstacle, a break of which may open the door for a test of the 7949 level, marked near the high of September 19th.
US NFP In The Spotlight
It’s a big day today for the US economy, as the focus will be on the country’s employment data for the month of September. The current expectation is for the figure to come out at 140k, which is slightly better than the previous number of 130k. If that happens, this could help the US dollar to strengthen against its major counterparts. But we would need to see an NFP reading closer to 200k, in order to have a decent move in USD. But so far, according to the forecast, it seems that market participants are not expecting a huge deviation from the previous number. But let’s wait and see. The only scepticism about the figure coming out above the previous one is the fact that Wednesday’s ADP nonfarm employment change number was slightly below its expectation. The forecast was sat at 140k, but the actual number came out at 135k. Some analysts tend to use ADP number try and predict the NFP number, but we have mentioned several times that both data sets may show opposite results, like they did last month.
If the NFP number comes out as another blow and falls below expectations, like it did last month, this could be another data set, which would disappoint the market this week. This could just confirm the fact that there won’t be any doubt of future rate cuts by the Fed, something that the US president desperately wants and has been vocal about it on several occasions. Apart from the US economic data, the Fed is also keeping an eye on the US-China trade wars, which if continue to escalate further in the negative direction, could also force the Federal Reserve to reconsider if more cuts will be needed.
USD/CAD — Technical Outlook
After forming a higher low on October 2nd, USD/CAD exploded to the upside and broke above the 1.3310 barrier, marked by the high of September 18th. The pair continued to move a bit higher, but found resistance near the 1.3348 hurdle. At the time of writing, the rate has stalled slightly below that hurdle. Given the sharp uprise in a short period of time that we saw on October 2nd, there is a chance for a small correction back down first, before another leg of buying. This is why for now, we will stay cautiously-bullish.
A small decline may test the above-mentioned 1.3310 barrier again, which could play the role of support this time. If it holds, the pair might rebound back up again, potentially aiming for the 1.3348 hurdle again, which is marked by yesterday’s high. If the buyers continue showing their interest, a break of that hurdle would confirm a forthcoming higher high on the shorter timeframe and the move may clear the path towards the next potential resistance area, at 1.3383. That area kept USD/CAD down on September 3rd.
Alternatively, a drop back below the 1.3310 zone, could make the bulls worry again, especially if the rate also slides below the 1.3290 territory, marked by the high of October 1st. If such a move occurs, more sellers could be joining in and driving the pair towards the 1.3260 obstacle, a break of which may send USD/CAD to the 1.3232 level, marked near the lows of September 16th, 17th, 24th, 26th and October 1st. Around there, the pair may also test the short-term upside support line taken from the low of September 10th.
As for the rest of today’s events
The US and Canada trade balances are due to be released. The US deficit is expected to have widened somewhat, while the Canadian one is anticipated to have slightly narrowed. Canada’s Ivey PMI for September is also coming out, but no forecast is currently available.
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Originally published at https://www.jfdbank.com on October 4, 2019.