GBP recovers after hitting multi-decade low; ISM falls below 50

Summary:

• GBPUSD recovers after falling below $1.20

• Brexit developments in focus as UK MPs return

• ISM Manufacturing PMI: 49.1 vs 51.2 exp

• Wall St resumes trade in the red

• DE30: Thyseenkrupp leads the losers

There was more selling seen in sterling this morning with the GBP/USD rate dropping below the January 2017 low to trade at levels not seen in 34 years! There’s not been a single fresh major catalyst for the declines with the depreciation seen likely an example of the markets getting jittery as MPs return from their summer recess and event risk ramps up markedly.

It is worth pointing out that the multi-decade lows don’t include the October 2016 flash crash where lower prices were seen amidst the pandemonium, and while it remains unlikely we get a repeat move anytime soon, the chances of a sizable swoon lower are rising. 3-month volatility in the pound has surged of late, with markets now pricing wilder swings in the currency than in EM currencies such as the Brazilian Real and Mexican and Colombia Peso - markets that are traditionally subject to far higher volatility than sterling. 

As the day has worn on the pound has recovered somewhat and is actually trading higher on the day against most of its peers. MPs are set to vote tomorrow on a bill which would seek to block no-deal Brexit in what could be a major event for GBP traders. 

US ISM report was much anticipated as PMI reports showed signs of very delicate rebound in activity in Europe and most of Asia. However, in case of US the ISM slid to 49.1 points – well below the consensus of 51.2 points and the lowest print since Feb’16. It’s pointing to a contraction with key categories of employment and new orders turning to contraction as well. It is sure to intensify recession concerns, especially is a similar message is repeated by ISM non-manufacturing (report on Thursday). Just before the ISM print we got the final market PMI and with a small upward revision from 49.9 to 50.3 points a contraction scenario has been avoided. However, investors pay more attention to the ISM as it has much longer track record. US markets are down after the report. US30 was struggling below the key 26500 resistance zone and now it’s turning clearly lower and the EURUSD has recovered from today’s red as 50bp cut speculation will intensify in the US.  

The NYSE and NASDAQ are both reopened this afternoon for the first time this week after remaining closed on Monday to celebrate Labour day. The return of the US may add some greater volume with the US indices drifting back and forth in recent trade. The broader range for both the S&P500 (US500 on xStation) and the NASDAQ 100 (US100 on xStation) continues to be respected while the break higher in the Dow Jones (US30 on xStation) on Friday appears to have been false.

 When it comes to specific news from companies listed on the DAX it is worth focusing on Thyssenkrupp (TKA.DE) as the stock is down by almost 4% on the European close. The decline appears to have something to do with comments from Bank of America as well as Morgan Stanely. The first bank said that although it sees European steelmakers as cheap (as many of them trade below 0.5x P/BV), they are facing a lot of challenges, hence it could be a “value trap”. Either way, BofA analysts maintained its buy call for Thyssenkrupp with the price target of 15 EUR (the spot is 10.7 EUR). In turn, quite upbeat comments came from Morgan Stanley as the bank said that Thyssenkrupp has scope to unlock meaningful value by restructuring its portfolio. Analysts added that an IPO of elevator business would be a good starting point to release capital to help restructure remainder of the company.