Europe set for a positive open as flash PMIs bring down the curtain on Q3

After the sea of red that characterised Monday’s sell-off, we saw a little bit of a turnaround on Tuesday, though not to the extent that we got anywhere close to changing the narrative of an ever-increasing concern about the economic outlook heading into year end.

The S&P500 managed to make the best of Monday’s gains rising over 1%, however these gains were primarily driven by the big tech stocks of Amazon, Alphabet, Microsoft, Apple and Facebook.

Other smaller technology stocks like Zoom, Pinterest, Docusign and Adobe were also notable in seeing fairly decent gains.

This strong performance on the part of US stocks is likely to translate into a similarly positive open for European stocks this morning, however there is rising concern that in light of surging infection rates across Europe, and the beginnings of a rise in hospitalisations, that the economic rebound from the lockdown lows is set to finish the year with a whimper.

Yesterday’s actions by the UK government in imposing closing time restrictions on the hospitality sector, as well as table only service, along with the reinstatement of the working from home advice for at least six months, has raised the very real prospect of a whole host of businesses which may not survive until the end of the year.

As if to reinforce that economic reality Whitbread, owner of one of the UK’s largest budget hotel chains, Premier Inn, announced the prospect of the loss of up to 6,000 jobs, while pub chain JD Wetherspoon also announced a raft of job losses..

While none of these measures are welcome, there appears to be a concern amongst some in the government, as well as public health officials, of where Spain and France go, the UK could well follow, and it is events there that appear to be dictating the direction of travel for government policy.

We’ve already seen early evidence in the latest economic data from both France and Spain that their economies were already seeing a tailing off in economic activity in the August PMI numbers.

Today we’ll see whether that trend has continued when we get the latest flash PMIs for September from France, as well as Germany.     

For several weeks now there has been increasing evidence that the rebound seen in France and Germany in the weeks after the relaxation of lockdown has started to run out of steam already. Even in Japan the economic recovery has been weak with their very own services and manufacturing sectors still in contraction.

In the most recent August PMIs, the numbers painted a mixed picture for the German economy, with services in particular showing a slowdown to 52.5, after a strong July performance. In France it was a similar picture with services slowing sharply to 51.5 from 57.3, as rising infection rates prompted localised lockdowns and restrictions being imposed across the country.

As we come to the end of Q3 it is clear we’ve seen a fairly decent recovery in economic activity after the big contractions in Q2, however it is also becoming clearer that this could well be as good as it gets. A further deterioration in today’s September PMIs is likely to reinforce these concerns, with a best-case scenario being a stabilisation. This appears to be what is being expected, however the risk of a downside surprise is a very real concern.

Expectations for services PMIs are for a stabilisation for both France and Germany to 52.2 and 53 respectively. Manufacturing is also expected to remain steady at 50.6 and 52.

It was also a more positive day for the pound yesterday, after Bank of England governor Andrew Bailey poured cold water on the idea of negative rates in the near term. He said that the MPC were merely looking at the logistics of such a move to establish if there was a way they could be implemented.   

As far as the economic numbers in the UK are concerned, in general, they have been better when compared to France and Germany, however a lot of that can probably be put down to the UK economy seeing its restrictions being eased more gradually, and later, which gives the added advantage of seeing slightly more pent up demand, despite no deal Brexit concerns hanging over the economy like a dark cloud.

In August the latest PMIs were uniformly positive, which means expectations for the UK economy are slightly higher. The hope is that September will continue to see economic activity remain close to the levels seen in August, where “eat out to help out” helped boost the services numbers significantly.

As a result, services activity hit a five year high of 58.8, also helped by stronger demand in the housing market, and increased domestic spending as consumers holidayed at home. Manufacturing also held up well coming in at 55.2. Expectations are for services to come in slightly lower at 57, still pretty good, and manufacturing at 54.3, as we come to the end of Q3.

Of course, after the events of yesterday, and the sudden tightening of restrictions, all of this is rather moot, as well as auguring badly for any type of continuity as we look towards Q4, not to mention what it does for consumer confidence.

After what can only be described as a fairly decent, if socially distant summer, yesterday’s TV address by Prime Minister Johnson was the equivalent of the onset of winter, and six months of hard slog.

Winter is indeed coming, and it could be here sooner than we think.   

EUR/USD – the move below the 50-day MA now opens up the prospect of a move back to the 1.1540 area initially, as well as the 1.1480 level. Only a move back above the 1.1780 area would undermine this scenario., and argue a return to 1.1900. 

GBP/USD – the support at the 200-day MA is barely holding, with a break below the 1.2700 area arguing for a move towards the 1.2500 area. Yesterday’s highs at 1.2870 are a key resistance area.  

EUR/GBP – found resistance at the 0.9220 area before slipping back. While we hold above 0.9130 the risk remains for further gains, even though the move feels stretched. Below 0.9130 targets the recent lows at 0.9080.

USD/JPY – appears to have found a short term base at 104.00 and could move back towards the 106.20 area, on a move above the 105.30 level.

FTSE100 is expected to open 57 points higher at 5,886.

DAX is expected to open 100 points higher at 12,694.

CAC40 is expected to open 30 points higher at 4,802.