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Markets Look to Fourth Quarter

Interest Rates, Inflation, and GDP Growth the Main Theme of the Last Quarter of 2015

eurozone-deflation

Equity markets managed to post modest recoveries yesterday across the board after a month which saw a resumption of the downtrend in commodity markets and growing uncertainty surrounding the Federal Reserve’s interest rate hike plans.

Eurozone Inflation Weakens

Data released yesterday showed that Euro Area headline inflation data fell back into negative territory in September, contracting at a -0.10% annualized pace. The weakness in oil prices continue to be a drag on inflation in the Euro Area with countries such as Spain and Germany posting deflation readings. With inflation so subdued, markets are rife again with expectations of the ECB expanding its QE program. Crude oil prices have largely stabilized in the past few weeks with the sharp declines becoming more restrained, offering some hope for inflation to pick up in the coming months ahead. EURUSD has since reversed its gains and confirmed the bearish reversal just shy of the 1.1300 handle, breaking below the 1.1200 handle. Further declines are expected with a potential to eventually test the next main support level at 1.1100.

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China Manufacturing Soothes Markets

The monthly manufacturing PMI data from China released overnight showed a modestly better than forecast print. The official manufacturing PMI increased marginally to 49.8 from 49.7 in the prior reporting period while the non-manufacturing PMI was unchanged at 53.4. The Caixin final manufacturing PMI was also in-line with expectations at 47.2, marking a slight improvement from last month's reading of 47.0. The mild gains posted in the manufacturing sector from China gave the Aussie dollar a boost, with the currency up 0.68% for the session, trading near 0.7060. The Australian dollar continues to trend to the upside despite trading sideways most of the previous session. AUDUSD broke yesterday's highs at 0.7036 posting a near 5-day high in early trading today. The main resistance level at 0.7035 also marks an important longer-term level which has capped earlier rally attempts.

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S&P 500 Turns Bullish

Major US equity benchmarks managed to close out the month with modest gains despite the outlook remaining overwhelmingly bearish. The revision lower in corporate earnings estimates and expectations of falling revenues across the board have increased the downside risks facing the equity outlook. Early trading saw December S&P500 futures trending higher, breaking above key resistance at 1915. The follow through comes after prices formed a doji reversal candle near support at 1870 two days ago. Resistance comes at between 1945 and 1950, which marks the break out from the minor rising trend line connecting the lows of August 24th and September 18th. A break above the resistance level previously delineated could possibly invalidate further downside moves with the next main resistance at 1981 playing a key role which could determine the near-term bias in the markets.

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ISM Manufacturing Ahead

The Institute of Supply Management will be releasing the monthly ISM manufacturing number for the September. Expectations are for ISM manufacturing to have fallen to 50.8 from 51.1 in the prior reporting period. The monthly private payrolls data released by the ADP yesterday showed a moderately stronger print, with private payrolls rising by 200,000 and beating estimates of 190,000 jobs gained. However, one negative element was the revision lower in the prior months figure to 186,000. While the latest data was stronger than expected, the manufacturing employment subsector showed another decline, falling -14,000 which further tilts expectations to the downside ahead of today's ISM manufacturing number. USDJPY has stayed range-bound for the past few days, potentially setting up for a breakout on tomorrow's jobs data. Resistance is currently at 120.30, which if broken could see USDJPY rally towards the 121.00 handle.

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Upcoming Events

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  • 08:55 GMT
  • EUR
  • German Manufacturing PMI (September)
  • 52.5
  • 52.5
  • 09:00 GMT
  • EUR
  • Manufacturing PMI (September)
  • 52.0
  • 52.0
  • 09:30 GMT
  • GBP
  • Manufacturing PMI (September)
  • 51.3
  • 51.5
  • 14:45 GMT
  • USD
  • Manufacturing PMI (September)
  • 53.0
  • 53.0
  • 15:00 GMT
  • USD
  • ISM Manufacturing PMI (September)
  • 50.6
  • 51.1