Stability in Asian markets overnight is offering support to European indices ahead of the open on Wednesday following another turbulent start to the week.
In the absence of changing fundamentals, we appear stuck in a sentiment driven market that is being controlled by fear of further declines and instability. China has been largely behind much of this in recent weeks, with stocks in the country experiencing an enormous amount of volatility and selling pressure.
The fundamentals here haven’t really changed here though, the economy is slowing as it tries to manage the transition from an investment dependent economy to a consumer driven one. Granted, the slowdown has possibly been slightly greater than some anticipated and the official figures are being called into question a lot more but that doesn’t really justify all the panic in the markets right now.
Neither does the prospect of a rate hike in the U.S. which the Federal Reserve has been trying to prepare U.S. all for, for much of this year. A rate hike may be disruptive for emerging markets but the impact shouldn’t be too large as any further hikes would be gradual, which is why the first must come soon. A faster pace of hikes with a later start date could be more damaging.
None of this is preventing the markets being driven by fear right now. Of course, investors always need something to focus their attention on, something to direct them. The summer is quite often a time that offers little of that and maybe that’s why this irrational fear is driving markets right now. It’s also probably a good thing as they were looking a little frothy, it could be argued that there’s much more opportunity in the markets now than there was before.
The September Fed meeting is fast approaching and on Friday, vice Chair Stanley Fischer acknowledged that any data released between now and then could influence the decision. If the decision is close, recent data may tip it one way or another. With that in mind, Friday’s jobs report will be key, as will today’s data.
The ADP non-farm employment report is effectively meant to act as an estimate of Friday’s official non-farm payrolls figure, although it is rarely accurate. It tends to be better served as a warning of a big swing in either direction. More important today is probably the non-farm productivity and labour cost data, two things that the Fed certainly monitors closely. Improving productivity tends to lead to wage growth, while higher labour costs are inflationary as the prices are usually passed on to the consumer.
U.K. construction PMI data will be released this morning and is expected to remain well into growth territory at 57.5, despite slowing somewhat over the last year. Spanish unemployment figures are expected to show a rise of 35,300, the first increase in the number since the start of the year and probably only a one-off jump. The economy remains firmly on the path to recovery and was even lauded for its efforts yesterday by German Finance Minister Wolfgang Schaeuble as being the best example that a lot of things have been done right.