Macro Morning: More weak manufacturing data

I thought that the market, stocks that is, might rally as we head toward Mario Draghi’s important announcemenon Thursday but the data just won’t co-operate. Markets were under intense pressure. Before we look at the data a couple of things worth noting are that it seems to me that Draghi is going to cheat and the market could react badly.

Cheat is a strong word and I don’t use it lightly even if I don’t necessarily mean it as a pejorative – he is just trying to find a way to get the job done. Last night details of a meeting between the ECB President and European politicians leaked to the market. The details of the leak suggest that Draghi is going to use the ECB’s balance sheet to buy shorter end bonds because these are within the ECB’s mandate. No prizes for guessing what Jens Weidmann over at the Bundesbank is going to feel about this. More broadly it seems to me that if this does come to pass then we have the two most significant central bankers in the world unable to carry their boards and or other stakeholders in order to stimulate in the manner that they see fit. Not exactly the best outcome.

Equally concerning was the fact that Moody’s Investor Services dealt themselves back into the fray saying that they are looking at the Triple A status of the Eurozone as a whole and in particular the big Triple A rated countries. No surprise really but not exactly timely news for the market.

So at the close of play European stock markets were down across the board with the FTSE dropping 1.50%, the DAX dropped 1.17%, the CAC was down 1.58% but Madrid somehow managed to buck the trend and rising 0.73%. Possibly this is because the Spanish government kicked the can with a further injection of €6 billion into their bank stability fund but it only seems a matter of time before the Spanish PM puts his hand out for European help. Equally though the big rally in Spanish short end bonds on hopes of Draghi’s cheque book also probably helped.

Markets have been focused on the PMI data for the past few months as it has been signalling the manufacturing slowdown was intensifying. In the US overnight the ISM Manufacturing index was slightly weaker than expected at 49.6 which is the lowest level since July 2009. Equally, the JP Morgan Global manufacturing PMI fell to 48.1 in August from 48.4 in July which was also the lowest reading since July.

Is this why stock markets are focussed on the negative not what some are characterising as the positive of Mario Draghi saying he is going to do QE? Probably, but we’ll see when Draghi makes the actual anouncement on Thursday and the Bundesbank and others react how the markets take it. Interesting few days ahead.

In the US, stocks were down heavily at one stage with the markets down heavily before being rescued by Apple sending out what seemed to be invitations to the launch of its 5th iteration of the iPhone. At the close of play the S&P 500 fell 0.12% to 1,404, the Dow was down 0.42% and the NASDAQ, reflecting Apple, was up 0.26%. It is tentative at this point but the base forming in the S&P around 1390/95 seems to potentially be setting the market up for a bounce – we’ll see but I’m not getting too bearish unless this level gives way.

On commodity markets, in aggregaste the CRB bairly budged but crude dropped 1% and is trying to break down through the trendline we have been watching for some time now. It actually traded through the line but once again, as it did last week, managed to close at or above the line, thus reinforcing it. Gold was up $10 an Oz or 0.63% to close at $1,698.30 just below my $1,700 level, a close above which I’ll be on board with this rally.

On currencies the Australian dollar remains under pressure. Even though the RBA left rates on hold yesterday there was a slighthly less sanguine tone in the statement and the news that global manufacturing continues to slide and that FMG is shelving some investment plans simply reinforces the current change of view toward Australia and our currency. Today’s GDP data has also been downgraded with regards to expectations. Just a month or so ago the market was expecting a print above 1% yesterday with the partials in the bag Westpac has downgraded its view to 0.6% for the quarter. I’m at the disappointing end of the GDP spectrum and I believe that it was the deflator that masked the weakness that was in evidence last quarter and Australian data has been weaker lately so watch out at 11.30 today.

The Euro showed a little strength early but then ran into sellers who knocked it back and it is sitting on the low point of the last 24 hours range at 1.2562 as I write. Likewise the Pound is at the bottom of its 24 hour range at 1.5869. USD/JPY is still doing nothing.

Lets have a look at some of the markets we follow using our AVATrade trading platform charts.

EUR/USD: The Euro could not build momentum to push through this big roofline for the down trend that reaches all the way back to the 1.4550/60 top in August 2011 and sat at 1.2646 yesterday making a high of 1.2624 before pulling back. Euro looks biased lower over the next day or so. :

AUD/USD: The AUD’s slide continues and it is now below the 38.2% retracement level of the May – August rally which in Fibo terms suggests a move toward 1.0091 which is the 50% and then the 61.8% which is at 0.9982. We’ve been targetting lower for some time and I noted yesterday that we may be looking for a slowing in the fall or a bounce. That has not happened yet and I am still a bear but 1.0190 might find some support and below that 1.0165/75:

DATA: GDP is what it is all about today. Even with all the partials each quarter this data point can often surprise and then of course because it is a “real”number the inflation part, the deflator, can also impact the outcome. But any weakness in this data today is simply going to reinforce the changing sentiment toward Australia and the AUD.  Of course a positive surprise is not out of the question.

Here is today’s data and you can click here for the full week’s calendar. Please note that data coloured blue is important to me and that which is coloured red is important to everyone.

And here is how the markets closed at 6.00 this morning courtesy of AVATrade

Twitter: Greg McKenna. He is the Chief Investment Officer of Macro Investor, Australia’s independent investment newsletter covering trades, stocks, property and yield. Click for a free 21 day trial.

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