Equities traded mostly higher yesterday, perhaps as the miss in the ADP report encouraged investors to add to their bets over a delayed decision by the Fed to start scaling back its QE purchases. However, we will pay more attention to Friday’s official employment report before we examine how expectations around the matter have been shaped. Expectations are for a decent report, which could raise the volume of the hawkish voices among the FOMC, which could eventually lead to an early tapering.
Investors Add to Their Exposure After Soft ADP Number
The US dollar traded lower against all but one of the other major currencies on Wednesday and during the Asian session Thursday. It gained fractionally only versus CAD, while it lost the most ground versus AUD, NZD, and EUR in that order.
The weakening of the US dollar, combined with the strengthening of the risk-lined Aussie and Kiwi, suggests that markets may hay have traded in a risk-on manner yesterday and today in Asia. Indeed, taking a look at the equity world, we see that the majority of the European indices finished their session in positive territory, while, although sentiment softened later in the US, the Nasdaq managed to hit a fresh record high. The S&P 500 closed virtually unchanged, while the Dow actually slid somewhat. Market appetite was more on the mixed side during the Asian session today. Both Japan’s Nikkei and China’s Shanghai Composite traded in the green, while Hong Kong’s Hang Seng and South Koreas KOSPI slid.
Yesterday, we noted that market participants may trade a bit more careful heading into Friday’s US employment report for August. However, for some, this may have not been the case, and the trigger for increasing their risk exposure may have been the miss of the ADP jobs report. The report revealed that the private sector gained 374k jobs, slightly more than July’s 326k, but way less than the forecast of 613k. Following Fed Chief Powell’s dovish Jackson Hole remarks, this may have encouraged investors to add to their bets over a delayed decision by the Fed to start scaling back its QE purchases, and may have also raised speculation that the NFPs, due out on Friday, could also miss their forecast. That said, we repeat once again that we are reluctant to rely much on the ADP number, as it is proved to be far from a reliable predictor for the NFPs. Even last month, when the ADP number fell to 330k from 680k, the NFPs held more or less steady around 940k.
Now, the median forecast for the NFPs is at 750k, but the range of estimates is from 375k to 1.02m, which suggests that analysts and participants do not have yet a clear picture over how the labor market faired during the month. In any case, the median forecasts point to another decent report, something that could revive speculation over a QE tapering as early as at the upcoming gathering, and may help the dollar rebound. The opposite could be true if we see the actual number coming closer to the lower bound of the estimates range. This could keep the greenback under pressure and allow equities to continue sailing north, as later tapering could also mean later rate hikes, and thereby lower borrowing costs for companies for longer.
Yesterday, we also had an OPEC+ meeting, with the organization and its allies sticking to their existing policy, despite being pushed by the US to pump more. That said, they revised up their demand forecasts for next year, which means that at some point, they may indeed feel comfortable to increase production more. As for oil prices, they barely reacted on the decision, as it was well anticipated.
Euro Stoxx 50 – Technical Outlook
Euro Stoxx 50 traded opened with a positive gap yesterday, but hit resistance at 4251 and then, it pulled back. Overall, the index continues to trade above the upside support line drawn from the low of July 19th, and this keeps, at least, the short-term outlook positive.
The current setback may continue for a while more, perhaps for the price to challenge once again that line, from which investors may jump back into the action and push for another test near 4251. If they manage to overcome that hurdle this time around, they will enter territories last tested in January 2008 and perhaps challenge the round figure of 4300.
On the downside, a dip below 4140 could confirm the break below the upside support line and may pave the way towards the 4103 level, marked by the low of August 20th. Another break, below 4103, could extend the fall towards the 4080 barrier, which is the low of August 19th, or the July 27th low, at around 4052.
EUR/USD – Technical Outlook
EUR/USD edged north yesterday, hitting resistance at 1.1857 and then pulling back. Since August 27th, the rate is trading above the prior downside resistance line drawn from the high of June 1st, while printing higher highs and higher lows above a newly established upside line taken from the low of August 20th. All this suggests that the short-term picture may have turned positive, at least for now.
The current retreat may continue for a while more, but we see decent chances for the bulls to jump back into the action from near the short-term upside line, slightly above the 1.1793 zone. If so, we could see a strong rebound above 1.1857, a move that could pave the way towards the 1.1900 area, which provided strong resistance between July 30th and August 4th. If that area doesn’t hold this time around, we could see advances towards the 1.1940 territory, slightly below the high of June 28th.
On the downside, a dip below 1.1705 could signal the resumption of the prior downtrend and may encourage the bears to dive towards the 1.1665 obstacle, which stopped the pair from moving lower on August 19th and 20th. A break below that zone would confirm a forthcoming lower low on the daily chart and could see scope for extensions towards the 1.1620 zone, marked by the low of November 2nd.
As for Today’s Events
During the US session, we have the initial jobless claims for last week, which are expected to have declines somewhat. The US and Canadian trade data are also coming out.
As for the speakers, we have two on today’s agenda, and those are Atlanta Fed President Raphael Bostic and San Francisco Fed President Mary Daly.
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