The Closer You Look At ISM PMI The Uglier It Gets

With PMI crossing below 50, calls for a recession are again on the rise. And this is no surprise, given the red flags within the internal indices.

Of the 10 sub-indices, 9 are contracting (below 50)
New orders are at a 7-year low (considered a leading indicator for the PMI itself)
New export orders have nose-dived to levels not seen since 2009
Employment is contracting at its fastest rate in over 3-years
Production contracted for the first time in 2 years

The trade war is clearly beginning to bite. Looking through the ISM report, some respondents feeling the pinch with comments such as “slowest month this year in sales”, “business is starting to show signs of a broad slowdown” and “while business is strong, there is an undercurrent of fear and alarm regarding the trade wars and a potential recession.

But the question now is whether this is a temporary ‘blip’ like seen in 2016 and 2012 (although headline PMI only hit 50 in 2012), or is it start of something much more severe? Time will tell, but traders are forward looking and likely adjusting portfolios to a more defensive stance.

Interestingly, the USD lost strength when the ISM crossed below 50. Whilst the data is clearly not great, it could also pile extra pressure on the Fed to ease further out; and prior analysis suggests that the USD tends to strengthen in the weeks following a cut. However, assuming the loss of USD is simply a knee-jerk reaction, we may be able to use this to our advantage.

Over the near-term, we see potential for USD to strengthen and allow respective pairs to retrace. As one example, EUR/USD suggest a little mean reversion could be on the cards.

EUR/USD has produced a bullish pinbar, and its low respected the August 2018 trendline.
The pinbar traded beyond the lower keltner band to suggest near-term exhaustion.
By Monday’s close, EUR/USD had seen 6 consecutive lower closes which can (but not always) preceded a correction.

If prices retrace, we’d like to see 1.10 hold as resistance before considering short setups on the daily chart. A clear break of 1.1023/27 resistance suggests a deeper correction is on the cards, although we’d then look for the bearish channel to hold.

USD/CHF is also of interest. Whilst it is generally accepted EUR/USD and USD/CHF share an inverse correlation, this has not been the case since EUR/CHF established a steady downtrend, although the potential for a USD retracement also places this on the radar. Moreover, we noted USD/CHF’s tendency to trade lower throughout September, so yesterday’s bearish reversal pattern warrants close attention.

An evening star reversal has formed near the 200-day eMA and 78.6% retracement level. A break beneath 0.9860 confirms the 3-day pattern
The pattern occurred after failing to hold above a broken trendline, warning of a bull-trap
Whilst price action appears erratic in places, the more volatile sessions since June have been bearish and characteristics of price action has allowed for some large swings. Interim targets include 0.98 and potentially the 0.9715 low.

From time to time, StoneX Financial Pty Ltd (“we”, “our”) website may contain links to other sites and/or resources provided by third parties. These links and/or resources are provided for your information only and we have no control over the contents of those materials, and in no way endorse their content. Any analysis, opinion, commentary or research-based material on our website is for information and educational purposes only and is not, in any circumstances, intended to be an offer, recommendation or solicitation to buy or sell. You should always seek independent advice as to your suitability to speculate in any related markets and your ability to assume the associated risks, if you are at all unsure. No representation or warranty is made, express or implied, that the materials on our website are complete or accurate. We are not under any obligation to update any such material.

As such, we (and/or our associated companies) will not be responsible or liable for any loss or damage incurred by you or any third party arising out of, or in connection with, any use of the information on our website (other than with regards to any duty or liability that we are unable to limit or exclude by law or under the applicable regulatory system) and any such liability is hereby expressly disclaimed.

City Index is a trading name of StoneX Financial Pty Ltd.

The material provided herein is general in nature and does not take into account your objectives, financial situation or needs.

While every care has been taken in preparing this material, we do not provide any representation or warranty (express or implied) with respect to its completeness or accuracy. This is not an invitation or an offer to invest nor is it a recommendation to buy or sell investments.

StoneX recommends you to seek independent financial and legal advice before making any financial investment decision. Trading CFDs and FX on margin carries a higher level of risk, and may not be suitable for all investors. The possibility exists that you could lose more than your initial investment further CFD investors do not own or have any rights to the underlying assets.

It is important you consider our Financial Services Guide and Product Disclosure Statement (PDS) available at www.cityindex.com/en-au/terms-and-policies/, before deciding to acquire or hold our products. As a part of our market risk management, we may take the opposite side of your trade. Our Target Market Determination (TMD) is also available at www.cityindex.com/en-au/terms-and-policies/.

StoneX Financial Pty Ltd, Suite 28.01, 264 George Street, Sydney, NSW 2000 (ACN 141 774 727, AFSL 345646) is the CFD issuer and our products are traded off exchange.