Global economic confidence takes another hit

The week could not have gotten off to much more of a negative start with a series of disappointing economic data. The negativity started with China’s manufacturing activity announced to be slowing more than expected, followed by indications EU economic woes are returning when it was announced that Italian GDP contracted more than originally anticipated, alongside the German Manufacturing PMI unexpectedly being revised down to show contraction. It would be an understatement to suggest the China PMI only heightened fears over an economic slowdown and further highlighted the need for more stimulus from the People’s Bank of China (PBoC). The poor PMI data also had a negative knock on effect on the already freefalling Oil markets.

China is one of the world’s largest importers of Oil and signs of an economic slowdown in China correlates to investors anticipating there will be less demand for the commodity, which further pressured existing concerns regarding an oversupply of Oil. Crude quickly sunk below $64 to $63.72 for the first time since July 2009, while Brent dropped to $67.52. The domino effect refused to end there though, with commodity currencies once again feeling the pinch of lower Oil prices. The Aussie plummeted to its lowest value in four and a half years to 0.8417, while the USDRUB advanced to over 53 for the first time in history. The USDNOK appreciated to a six-year high at 7.0577, while the USDCAD came within touching distance of its own six-year high at 1.1458.

The disappointing EU economic data had minimal impact on the Eurodollar valuation, but it underpinned even further pressure on European Central Bank (ECB) President Mario Draghi to act this Thursday. In particular, the unexpected German Manufacturing contraction completely ruined optimism that Europe’s largest economy was entering the final month of the year with some momentum. One of the reasons behind easing speculation of further ECB stimulus in December within the past week has been due to improved German economic data leading to any potential stimulus facing fierce opposition from the Bundesbank, whose stance may not be as strong now.

Just when it appeared as if there had been enough twists and turns for one day, the US manufacturing sector was announced to have slowed during November to its lowest level since January. By this stage investors had already began closing positions on stocks, which also resulted in the Dollar weakening, but the US manufacturing sector slowing heightened fears that the US economy would be impacted by less global demand. USD softness resulted in both Gold and Silver rebounding from $1142 to $1120 and $14.41 to $16.78 respectively. It was previously highlighted that for both Brent and Crude Oil to recover some of its recent losses, it would require a weaker USD and this is exactly what transpired. Brent appreciated by over $4 to conclude trading at $72.80, while Crude progressed nearly $6 to conclude trading around $69.20.

Global stocks also pointed to the downside on Monday. The S&P 500 declined by over 15 points to drop to 2049.54, while the Dow Jones Industrial Average (DJIA) lost over 50 points to fall to 17,776.80. There seems to be some confusion regarding whether the drop in stocks yesterday was linked to plummeting Oil prices leading to a reduction in company profits, or the negative economic data. I side with the latter because I feel the primary reason behind the appreciation in the stock markets recently has been due to various central banks pumping more stimulus into their economies. This has led to optimism the increased stimulus will improve economic fortunes, but the data from China and Europe yesterday just exemplified that concerns over global growth remain. Therefore, investors took their opportunity to take profit yesterday.

The major mover on the currency markets was the GBPUSD, with the Cable transitioning from recording a new 2014 low of 1.5586 as the markets opened to appreciate over 200 pips higher and reach 1.5762. The reason behind the Cable falling so low on Monday morning was a combination of investors pricing in a likely downbeat autumn statement on Wednesday, alongside the falling commodity prices likely leading to UK inflation levels slipping below 1% sooner than expected. The Cable then recovered its gains due to the USD weakening, alongside figures showing the UK manufacturing sector grew at its fastest rate in four months during November.

Although the Bank of England (BoE) are unlikely to be raising rates anytime soon, the manufacturing figure was a reminder to investors that the UK fundamentals remain strong. Attention will now turn to Tuesday’s UK Construction PMI, where the expectations are for a weaker number than the 61.4 during October. After appreciating by over 200 pips on Monday, it would not surprise me if the Cable encounters profit taking today.

Written by Jameel Ahmad, Chief Market Analyst at FXTM.

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