In a relatively quiet day for medium to high impact news releases on Monday February 4th, the data that was published missed expectations and created doubts regarding the underlying strength of both the USA and U.K. economies. In the London trading session, the latest IHS Markit PMI for construction came in at 50.6, missing the forecast of 52.5. The reading was just above 50, the level that indicates contraction in a sector. February’s PMI print also represented the weakest reading since March 2018, when unusually cold weather prevented building projects from continuing.
According to Markit, employment growth across Britain’s construction sector has plunged to its lowest level since July 2016 (the month after the E.U. referendum). Markit reported that its building sector clients reported an unwillingness to take on new projects, until there’s further clarity on the U.K. position in relation to Brexit. Despite the construction news and the fact that PMIs are often regarded as leading indicators of activity, the FTSE 100 held its position above the critical psyche handle of 7,000, closing the trading day out at 7,034 up 0.20%, a two month high. Two other Markit PMIs for the U.K. will be published on Tuesday and analysts and FX traders will look towards these services and composite PMIs, for any further evidence that the U.K. economy may be flirting with recession, as the March 29th Brexit date approaches.
By 8:00pm UK time, GBP/USD had fallen by 0.32% to 1.304, still remaining above the 1.300 handle. The major pair had whipsawed throughout the day, in a tight range with a bias to the downside, oscillating between the daily pivot point and the first level of support. This skittish behaviour of sterling was replicated in EUR/GBP, at 20:00pm the cross pair traded up 0.10%.
Brexit news mainly concerned prime minister May’s commitment to visit Northern Ireland on Tuesday, to reinforce her govt’s commitment to ensure no border would be erected as a consequence of Brexit. However, this gift is not Mrs. May’s to give and unless she agrees to a permanent customs union, once the U.K. exits the European Union, then border processes will become enacted, under a no deal exit. Despite the February 13th deadline; to present a new withdrawal deal offer to Parliament, Mrs. May has so far failed to secure an appointment with the leading E.U. Brexit officials responsible for Brexit, to discuss the removal of the backstop from the withdrawal agreement.
In a slightly bizarre twist to the Brexit situation, on Monday afternoon the U.K. government announced that for the first few months after the March 29th exit, its U.K. border security forces will waive through imports, with the minimum of checks and ‘paperwork’. Naturally this process will not be replicated with goods travelling in the other direction to the E.U. The security implications that such a random decision could have, will no doubt be discussed in the U.K. mainstream media over the coming days.
Although the E.U. confirmed (once again) on Monday, that the withdrawal offer will not be reopened for discussion, Chancellor Merkel intervened by attempting to suggest an accommodation should be searched for. This sign of weakness, masquerading as typical Merkel pragmatism, could have materialised due to recent data from the E.U. suggesting the trading bloc is close to recession, a situation which will be made worse in the event of a no deal Brexit. The fragility of the Eurozone economy was illustrated by the latest Sentix investor reading coming in at -3.7, missing the expectation of -1.3%. France’s CAC index closed down 0.38% on Monday, whilst the DAX closed down 0.04%. EUR/USD traded down 0.20%, at 1.144 by 20:30pm.
The FOMC/Fed decision, to keep the key interest rate at 2.5%, appears to be have been judicious, based on the latest durable goods orders and factory orders, missing the forecasts by some distance. Factory orders for November fell by -0.6%, whilst durable orders came in at 0.7%, missing the expectation of 1.5% growth. Despite the data, the DJIA rose above the 25,100 level for the first time since early December 2018, when the index engaged in a bearish slump, which lasted until the end of the year. The NASDAQ traded up approx. 1% at 8:30pm U.K. time, up over 10% in 2019, whilst the SPX traded up 0.45%.
WTI oil traded down circa 0.87% at 8:35pm, close to the $55.00 per barrel handle. The concerns with regards to supply being disrupted, due to the political situation in Venezuela becoming critical, have relented over recent days, with oil falling from its yearly high of $56.00. Gold experienced a marginal sell off during the day’s trading sessions, which could be related to profit taking, or a move away from the precious metal, as a safe haven store of value. Having traded at $1,320 per ounce at the start of Monday’s trading sessions, XAU/USD gave up its position to trade as low as $1,308, before recovering to $1,303, down 0.35% on the day.
