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Cautious start ahead of NFP

Asian stocks recorded the biggest slump in 7 weeks. The Nikkei and Topix tanked by 3.36% and 3.17% as Japan's Tankan index showed that the manufacturing index hit the lowest since June 2013, while the big non-manufacturers index worsened for the first time in 6 quarters, hitting the lowest since March 2015. The sentiment for both small and big manufacturers worsened for the first time since June 2014, as the effects of the first sales tax hike had hit the economy. Japan's Economy Minister Ishihara did not refrain from saying that the government will proceed with the second sales tax hike as in the plans. The yen has been the best G10 performer against the US dollar.


Activity levels across China’s manufacturing sector expanded for the first time in eight months in March. Manufacturing purchasing managers index (PMI) rose 1.2 points to 50.2, marking the first expansion in activity levels seen since June 2015. For larger firms the PMI jumped to 51.5 from 49.9 in February. The readings for smaller and medium sized firms came in at 49.0 and 48.1 respectively, indicating contraction. Normally we could expect some sort of upside in risk assets in the wake of better than expected Chinese PMI. Certainly if they were poor, we'd be looking at a major downdraft in equities. Investors are clearly more focussed on the negative and we are witnessing a very cautious start to proceedings with markets clearly unwilling to position themselves with any real conviction ahead of the US labour report or indeed the weekend.


A too-strong euro is keeping the lid on any upside in European equities too and the best performing sector in Q1 - the basic resource sector is beginning to give up its gains already - fundamentally the upside in commodities was dollar driven rather than a change in the supply demand arena. European PMI releases have been a mixed bag - keeping the euro from re-establishing itself above the $1.14 level so far.


The UK’s manufacturing sector continues to be subdued – with job losses in the sector recorded for a 3rd straight month. In March, the index fell to 51.0, lower than the 51.2 expected, with output growth unchanged from February. This has seen the pound fall back slightly against the dollar but it remains above the $1.43 level.



The major event of the day is naturally the US jobs report in the US. The consensus for the March NFP is 205K, slightly less than the 12-month average of 212K. However, the number per se, has lost some of its significance since the FOMC Chair Yellen warned that the slack in the US labour market might be misrepresented by the data, and not for the best. In this context, even a strong NFP read could fail to revive the Fed hawks as the expectation for the next Fed hike has been pushed back to November.


On the flip side, the US dollar is having its worse quarter since 2010. Therefore we could question if a soft read, below 200K, could further enhance the USD sales given that the US dollar index has already lost 2% this week. Despite the deterioration in Fed hike expectations, the recent sell-off in the USD may have gone too far, in which case, even a soft read could see a limited downside in the US dollar.


Leading asset managers have divergent opinions on the USD’s future path so the outlook and direction of the greenback stays firmly at the discretion of ’’Fedspeak’’ for the time being.


Shire (+1.14%) is amongst the only risers as the European healthcare sector has been raised to neutral from underweight at Citi.


Rio Tinto (+0.43%) is slightly higher despite been downgraded to sell at Axiom. The copper and aluminium markets which have rallied strongly since the beginning of the year are beginning to soften and the outlook in respect of the supply glut vis a vis the lack of demand would indicate that we press lower from present levels.


Standard Chartered (-4.44%) is on the lower rung having been downgraded by S&P – the credit rating now stands at BBB+ from A-.


Royal Mail (-2.5%) is also a casualty adding to yesterday’s losses despite capturing a gain of 16% since mid- February. The group has bought international shipping software company Intersoft Systems and Programming. All part and ‘parcel’ of growing the deliveries business. The move is intended to give customers access to bespoke, international shipping solutions and as with NetDespatch and Storefeeder.


United Utilities (-2.17%) cut to hold at HSBC last week – the stock is approaching interesting levels. Trading at 903p presently, buyers have traditionally started to show up around the 890p level. Failure to hold above here would indicate a move back towards 850p.


We call the Dow Jones lower by 20 point to 17665.