DE30, EURUSD – warning signals from Europe

Quite unexpectedly, the European flash PMIs turned out to be a major sentiment shifters yesterday as they pointed at a significant deterioration in activity across the euro zone. The PMIs for industry and services stood at 53,6 pts., still above a barrier 50 pts. but clearly off their levels in August (55,1 and 55,9 respectively). German PMIs suffered even larger declines, from 58,2 to 55,3 pts. for the industry and from 57,2 to 54,6 pts. for services. The declines sew worries as the recovery within the euro zone (especially Germany) held up quite well so far despite a slowdown in the US. Meanwhile, a slowdown in the euro zone would make a fiscal consolidation more painful and less effective and – should it be confirmed – soften ECB’s stance which so far helped euro recover vs the dollar.

Weaker data does not help the bulls on the German equity markets. The DAX30 futures have struggled to climb to new highs for a while, and a negative fundamental impulse may provide a fuel for a correction. Today’s Ifo release and a close of the week may be crucial here.    

USDJPY – BoJ back in action

The Bank of Japan doesn’t want to wait and see the Fed pushing USDJPY to new lows. Today it has intervened once again, pulling the pair to 85,37, only to see it retracing to 84,80 within few hours. There were also rumors of the BoJ’s governor to step down, something that could help weaken the yen, as Shirakawa was perceived as too conservative.

The BoJ took advantage of a support at 84,35 to intervene but for as long as the pair stays below 85,90 a rebound won’t get a sufficient momentum. A deterioration of sentiment on the global markets doesn’t help either. The Japanese must stay in the market and hope for the (mostly US) data to help their case.

Events to watch – Ifo, durables, new home sales

The Ifo index is the key economic barometer for the German economy. It did surprise few times this year with upbeat readings, sometimes negating negative signs given by some other indicators (mostly ZEW). This time the market expects a moderate decline from 106,7 pts to 106,2 pts, however, after yesterday’s PMI a slightly lower reading would be acceptable. A reading of 105 and lower could spark a negative reaction on the euro and European equities. Later in the day, there is US data on durable orders (8.30 ET, 14.30 CET, consensus -1% m/m, +1% for core) and new home sales (10.00 ET, 16.00 CET, consensus 290k). After an increase in sales of used homes in August, a rise in sales of new homes could uphold the markets before the close of the week.

Przemysław Kwiecień, Chief Economist

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