UK construction strengthens ahead of tomorrow's services PMI

• Hong Kong fears heighten at latest threat

• ECB dominates as ABS takes centre stage

• UK construction strengthens ahead of tomorrow’s services PMI

• US awaits jobs report tomorrow

US markets are expecting to open in a more positive manner, after losses within Asia yet again extended over to the European session. The mix of fear surrounding the fate of the Hong Kong riots, coupled with alarmingly poor Eurozone data yesterday pushed Europe lower today, yet this seemingly has not been followed through into the US session where futures are pointing towards a positive open ahead of tomorrow’s jobs report. The S&P500 is expected to open +3, DJIA +3 and Nasdaq +11 points.

Overnight, the protests in Hong Kong have persisted, bringing the city to a standstill in their plea for democracy. With both sides unwilling to back down, this issue is likely to become an increasingly hostile battle between the student led protesters and Beijing. The latest threat from the protestors is that they will start to occupy government buildings should the current HK chief executive not stand down by today. However, with the whole of the Chinese one-party system at risk, the Chinese government is unlikely to provide any concessions in response to the very real threat that the same type of uprising would begin on the mainland in response to the new-found democratic freedom seen on Hong Kong. Markets are watching this very closely, with Hong Kong representing one of the main financial centres of the world and Chinese stability at risk.

Today’s session is largely set to be dominated by the monthly Eurozone circus at the ECB, where Mario Draghi is put under yet more pressure to act in the face of non-existent growth, rampant disinflation and perennially high unemployment. Coming off the back of last month’s meeting, where the main refi rate was pushed a mere 0.05% away from zero, it is clear that Draghi is running out of options. With rates at all-time lows, a 10 basis point move in rates is unlikely to spur on economic activity, especially given that previous rate shifts from Draghi have had little to no effect on inflation and output. With that in mind, the imposition of TLTRO’s and ABS purchases are yet another attempt to do what rates haven’t managed. However, after last month’s pitiful uptake in the TLTRO scheme pushes significant pressure upon a positive ABS scheme implementation, which is likely to be the focus of today’s meeting.

I do not expect to see any change in policy this month, with Draghi likely to focus upon the finer details of his ABS scheme rather than implementing further policy changes before this one gets going. Thus there is likely to be significant interest regarding which securities will be purchased under the ABS scheme, with particular focus likely to go upon the riskiness of those assets. For the most part, there is likely to be an initial push towards the safest securities, known as senior tranches, where the riskier assets would have to be approved by Eurozone governments which is likely to be discussed in October when the finance ministers meet.

With this in mind, I am keen to see what Draghi has to say at the Q&A session, where the topic of a fully blown asset purchase scheme will no doubt be raised once more. Given that we have seen inflation fall to a five-year low of 0.3%, there is massive pressure on Draghi to act and while economic data remains poor, there is little willingness within the markets to accept anything other than a QE programme. It seems the time is running out for Draghi, who is backed into a corner with precious little left to throw at the Eurozone before QE gets unleashed.

Today saw the UK construction PMI rise to an 8 month high of 64.2, building on what has been an outstanding year for the sector. The implementation of the UK’s help to buy scheme has no doubt brought about a spark to the housing market, which in turn has led to new building projects in line with new valuations. With the BoE looking to limit the amount of high loan to value mortgages on the market, we are likely to see a cooling in the prices, as seen by the 0.2% drop in prices last month. However, with new buyers comes regeneration of areas and thus I believe we could still see significant activity in the industry long after house prices normalise. Tomorrow brings the services PMI, which is the really number everyone is looking out for. However, with strong data coming out of the UK I would not be surprised to see yet further upside in that release despite predictions otherwise in the markets.

A very quiet US session sees the release of the unemployment claims figure as the only event of note. Given that we have seen the ADP number yesterday and will see the full jobs report tomorrow, today’s number will likely be somewhat of a non-event. Thus it is likely that markets will instead focus upon the ECB meeting and wait for tomorrows all important jobs report.