Despite a significant deterioration in the regional activity indices (especially in the region of Philadelphia) the national ISM snapped a three-months losing streak with a highly unexpected rise (the consensus was at 53 pts.) from 55,5 to 56,3 pts. The index has a relatively healthy structure with higher production and (quite interestingly) employment. The data means the US economy, while on the soft patch, isn’t collapsing and for as long as activity remains solid, there is a hope for an improvement on the labor market.
Interestingly the US equity indices moved higher after Wall Street opening ahead of the ISM release (and sort of neglecting a bearish ADP). Nevertheless the data cemented an improvement in sentiment and after breaking a short-term mid-term channel (http://www.xtb.com/strona.php?komentarz=16535) , the S&P500 futures are on track towards 1098 resistance.
While the US indices escaped the sell-off scenario (with a triple bottom on the S&P500), the German DAX30 may eye new 2010 highs again. The index used a support slightly above 5800, created by a trend line and lows from June and July and moved up, covering the gap from August 24th. The index even managed to reach a neck-line of the head and shoulders formation which cemented a downward correction in the second half of August. Now there is only a fast trend line on the horizon (previous support, now a resistance) and unless the US markets complicate things again, the 2010 highs of 6387 may be realistic again.
ADP – warning signals
In the context of an upbeat sentiment on the global markets one should not totally neglect the ADP reading. While the private ADP research is not the perfect guide of the government payrolls report it may actually provide a better gauge of trends on the labor market. Within the past two years, the ADP and private payrolls pointed at similar direction but the ADP was less volatile, giving no indications of a possible improvement in the spring of this year. Now, with the August ADP revealing the first decline in private employment in 7 months, the labor market deterioration seems confirmed.
EURUSD – in a consolidation
A situation on the EURUSD remains tricky. The pair skyrocketed yesterday gaining on improvement in the sentiment, however the euro lost on the ISM reading. So once again we have a situation, that the euro loses on the solid US data (and gains on the poor) and moves in the opposite direction (usually stronger) on the sentiment. The problem is, the sentiment stems from the data too… (stronger readings, better sentiment).
One things seems to be certain. The pair broke through a resistance of 1,2780 and negated a running correction (downward) scenario. For as long as resistances of 1,2854 and 1,2920 and supports of 1,2588 and 1,2623 do hold, the pair is set for a consolidation.
Events to watch – claims and central bankers
Claims reading at last week’s 473k is far from perfect but against August average so far (488k) it is still an improvement. Therefore the market hopes for a similar reading (8.30 ET, 14.30 CET, consensus 476k) which would help maintain the sentiment until tomorrow. The central banks in Europe (BoE at 7.00 ET, 13.00 CET, ECB at 7.45 ET, 13.45 CET) are pretty much in the background, perhaps with the Trichet’s conference (starting 8.30 ET, 14.30 CET) as the most interesting part. Markets will be more interested in the Bernanke’s speech in front of the Financial Crisis Enquiry Commission in Washington (9.00 ET, 15.00 CET). Finally, a pending home sales report is due after Wall Street opening (10.00 ET, 16.00 CET, consensus -1,3% m/m).
Przemyslaw Kwiecien, Chief Economist, X-Trade Brokers India