4010611 2677902016

It’s hump day for the markets, and there have been some key developments that could impact market direction for the next few days.

Stocks:

Tesco: Its share price has jumped to its highest level since July 2015 on Wednesday on the back of better sales growth for the first half of 2016. Although profits were lower and the pension deficit had nearly doubled, the market seemed happy with Tesco’s latest turnaround plan. This has helped to push Tesco above the 210p level, the next key resistance level to watch is 218p, the high from July last year.

The pension deficit is likely to remain a problem until bond yields rise significantly, but help could be at hand. Theresa May said in her final Tory Party conference speech on Wednesday that QE and low interest rates can’t last forever. With the ECB considering tapering QE early and the Fed pondering a rate rise in December, the era of low interest rates could soon be behind us. Although this may take a few years, it could be a positive theme for the blue chip corporates going forward.

Chart 1: Tesco reaches a 15-month high

Source: Bloomberg and City Index.

2, Has the Deutsche Bank sell off reached its peak?

Deutsche Bank extended its recent recovery on Wednesday and is close to a key level, its 50-day moving average at EU 11.95. A clear break above this level could trigger a move back to the 100-day sma at EU 13.00 in the short-term. Also worth noting, momentum seems to be on the upside, which suggests that there could be some more short-term upside for this stock.

The driver of this recovery is two-fold: 1, expectations that the DB head honchos will be able to reduce the $14bn fine from the Department of Justice, potentially down to the $5bn mark, which would be less devastating for the bank’s finances. 2, comments from the ECB that the Bank is near consensus on tapering its QE programme, has also helped to boost the stock price of DB. Ultra low interest rates have eroded DB’s profitability, which has been a long-term negative for the bank. If the ECB ends QE, then interest rates could move out of negative territory, helping to (slowly) restore European banks’ profitability in the future.

Chart 2: Deutsche Bank shares are approaching the 50-day sma resistance level at EU 11.95.

Source: Bloomberg and City Index

3, A big NFP number could be on the cards

The market is looking closely at the US NFP jobs data that will be released on Friday. The huge increase in the US non-manufacturing ISM for September is an encouraging sign for NFPs. The chart below shows the employment component of the non-manufacturing ISM and NFPs. The two tend to move in unison, thus the highest employment reading in the non-manufacturing ISM for 11 months, suggests that we could get a positive surprise from the NFP report on Friday.

A stronger jobs report for September could make a December rate hike from the Federal Reserve more likely, which may boost the dollar, and weigh on US stock indices. Post the strong non-manufacturing ISM on Wednesday, the dollar index has risen, and the S&P 500 has come under pressure. Expect something similar in the event of a positive surprise from the NFP on Friday, just on a bigger scale.

Chart 3: The employment component of the US non-manufacturing ISM has a strong positive relationship with the NFP jobs report.

Source: Bloomberg and City Index

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