Europe services sector expected to remain weak

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Europe services sector expected to remain weak
By Michael Hewson (Senior Market Analyst at CMC Markets UK)

With the US being off for their annual independence day holiday volumes could well be lighter than normal, however that won’t stop investors remaining concerned about the latest batch of economic data due to come out of Europe this morning.

Already this week we’ve seen manufacturing PMI’s remain firmly in contraction territory with a particular deterioration in France and Spain. With Spain about to receive a banking bailout, and surely only months away from a sovereign one as well, despite Madrid’s reluctance, concerns are now rising about the state of France’s finances.

This is particularly worrying given that it is Europe’s second largest economy and has a higher debt to GDP ratio than Spain does.

Earlier this week the independent French state auditor announced that the French government would have to cut €43bn by the end of 2013, in order to meet new European deficit targets.

To try and fill this gap and maintain credibility with the markets the French government announced a series of measures yesterday including, a tax of 75% on incomes of over €1m, higher taxes on large companies, banks and oil firms, as well as taxing capital gains at the same level as income tax. The government also announced a large capital spending plan to build 500,000 new homes a year and create 150,000 new jobs for young people. The fear is that all these higher tax rates will simply drive business away.

In any case today’s release of the final June services PMI data for Europe is likely to reinforce the need for action even more with figures for Italy, France, Germany and the Eurozone with only Germany showing any sort of growth, but even then 50.3 is barely in expansion. The remaining three are expected to show readings of 42.5, 47.3 and 46.8 for the Eurozone, all firmly recessionary.
European retail sales are also expected to decline again for May, down 1% year on year.

Later today German Chancellor Angela Merkel is due to meet Italian PM Mario Monti in Rome for the first time since she was ambushed in Brussels and forced to cede some ground in relation to how banking bailouts were funded.

In the UK concerns about the depth of the recession in the UK were reinforced yesterday when construction PMI unexpectedly dropped below 50 for the first time since December 2010. Construction companies put some of the decline to a slowdown in the housing market, and the extended June Jubilee bank holiday.
Given that the manufacturing PMI earlier this week also contracted the odds of the Bank of England acting to loosen monetary policy further appear to have increased further this week, irrespective of whether today’s services PMI data stays above the key 50 expansion level or not. Expectations are for a slight reduction from 53.3 in May to 52.9 in June.

EURUSD – a slight overrun down to 1.2560 yesterday but no follow through keeps the recent range intact with the upside resistance remaining at the 1.2750 level which also coincides with a number of other key resistance levels including the 55 day MA at 1.2756 and 50% retracement level of the 1.3285/1.2290 down move at 1.2790.
We still need a sustained fall back through the lows yesterday at 1.2560/70 to start a move back towards the 1.2420 level and last week’s lows.
A move below 1.2420 would be the first step towards the 1.2290 lows this year, while the primary objective remains unchanged at the 2010 post first Greek bailout lows at 1.1880.

GBPUSD – the pound continues to struggle above the 1.5700 level, failing once again near the highs of this week at 1.5725.
The 200 day MA at 1.5755 continues to act as resistance on the topside. While below this key level and the 50% retracement of the 1.6305/1.5270 down move at 1.5785, a fall back towards 1.5580 seems the most likely outcome.
The key support remains at the 1.5480 level, 14th and 15th June lows which we failed to get below last week. Only a break below here retargets the June low at 1.5270.
Only a close beyond 1.5755 the 200 day MA, targets 1.5910, which would be the 61.8% retracement of the move mentioned earlier.

EURGBP – pullbacks here have continued to remain below the 55 day MA at 0.8078 and trend line resistance from the highs this year at 0.8505 at 0.8090. As long as any pullbacks stay below here then further euro losses are the preferred scenario, otherwise we’re looking at resistance at the 0.8150 area.
The area below the 0.8000 level seems to be offering quite a bit of support at the moment; however the key level remains the 0.7950 area.
Once below 0.7950 we could well see a move towards 0.7845 and the November 2008 lows.

USDJPY – the choppy range continues to play out within the cloud with the top at 80.45 and the support above the 200 day MA at 78.80. We also have trend line support at 79.20/30 from the 4th June lows at 78.00.
To reiterate we need a weekly close above 80.50 to reassure about further upside.

Equity market calls
FTSE100 is expected to open 3 points higher at 5,691
DAX is expected to open 12 points higher at 6,589
CAC40 is expected to open 5 points higher at 3,276
FTSEMib is expected to open 31 points higher at 14,525

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