Equity markets in Europe and Asia are pushing higher, encouraged in large part by the latest upside surprise in manufacturing data out of China and the US. Futures in the Euro Stoxx 50 are suggesting a higher open by 1.2 percent, after the MSCI Asia Pacific index posted gains of 0.5 percent. The Dow Jones futures prices are essentially unchanged but the current price level is significant as yesterday say the highest close since 2007. Safe haven assets were lower on the day, with the Japanese Yen and Gold both lower by 0.4 percent. Oil also met some selling pressure yesterday, closing lower by 0.3 percent.
Macro releases yesterday showed that manufacturing in the US expanded during the month of April, matching progress seen in an earlier manufacturing survey out of China. The US ISM report came in at 54.8 for the month (after improving to 53.4 previously). This was followed by comments from three members of the FOMC, who said additional rounds of quantitative easing stimulus will not be necessary to ensure economic recovery in the country. The ADP employment report was also released, showing that companies in the US created 170,000 new jobs for the month (after a rise of 209,000 during the previous month).
In Europe, most of today’s volatility will likely be centered on financial shares after news headlines showed that the largest bank in Switzerland (UBS) released earnings that showed first quarter profits dropped by 54 percent on investment losses and accounting charges in company debt. This is likely to be matched in the UK, as Standard Chartered reportedly had revenue growth that is said to have been in the high single digits.
Looking ahead, the key event risk will be Friday’s Non Farm Payrolls data out of the US. The ADP report is generally thought of as a precursor for the NFP release and the relatively strong print in the ADP is suggestive of a strong performance in the labor market for the month. Expect a strong report to push equity markets higher but downside risk outweighs upside potential, so any weakness in the report could bring some significant selling pressure to the major stock indices and high yielding currencies.
The USD/JPY is moving lower with prices now testing the 200 day EMA, which is bring some stalling in the recent decline. The MACD indicator is showing negative momentum, so there is likely some more downward activity in the cards. The next major support to the downside is seen at 79.05, which is where the 61.8% Fibonacci retracement of the rally from 76.00. Look to buy bounces out of this region, and only a break of 81.80 will accelerate gains.
The S&P 500 is caught in an upward parallel channel with the next significant resistance coming in at 1420. These are major long term highs, so while an upside break will invigorate the bullish bias, there is far more room to the downside to provide excellent risk to reward ratios. First support is now seen at 1390, which is also where the 100 and 200 period EMA are clustered. Looking to sell rallies.