Daily Report: Markets Remain Risk-Off after German Merkel's Defeated in Local Elections

Risk aversion dominates the markets today as Asian equities open broadly lower follow the employment data triggered sharp fall in US stocks last Friday. There are also fresh concerns over the situation in Europe after German Chancellor Angela Merkel's ruling party, losses support in a local election in Merkel's home state. The center-left Social Democrats won 35.7% of Sunday's vote while support of Merkel's conservative Christian Democratic Union slid to 23.1%. Investors are also cautious ahead of an eventful week and Europe, where German court will rule on bailout, ECB will discuss Italy bond-buying and Greece will find out bone swap interest.

Another factor that's weighing on sentiments was that China HSBC services PMI dropped sharply from 53.5 to 50.6 in August, just keeping the index mildly above sub-50 contraction region. That's a record low which suggests that the impact of credit and property tightening measures are filtering through to the services sectors which would drag down GDP growth ahead. Other services data will also be released later today which would trigger volatilities in the markets. Eurozone PMI services is expected to be finalized at 51.5 in August. UK PMI services is expected to drop slightly to 54.3 in August. Other data include Eurozone Sentix investor confidence and retail sales.

Australian dollar was the relatively stronger currency in mid-to-late August risk rebound, partly supported by speculation that RBA won't cut rates this year. The RBA will very likely be on hold tomorrow. Indeed, the central bank is now expected to leave interest rates unchanged longer than previously expected. Some market participants even bet a rate cut later in the year after the governor's testimony to the House of Representatives Standing Committee on Economics. The latest Credit Suisse swap index shows the market has priced in -114 bps rate cut by the RBA over a year. We have not yet changed our monetary forecast from tightening to easing. However, we do expect the central bank will not raise interest rate anymore at for the rest of the year.

GBP/USD Daily Outlook

Daily Pivots: (S1) 1.6171; (P) 1.6212; (R1) 1.6253;

GBP/USD's fall from 1.6618 resumes after brief consolidation an intraday bias is back of the downside for deeper fall. Break of 1.6110 support will confirm that whole rebound from 1.5780 is finished and should bring further decline to retest this key support level. On the upside, above 1.6253 minor resistance will turn bias neutral and bring consolidations first. But risk of another fall will remain as long as 1.6545 resistance holds.

In the bigger picture, price actions from 1.3503 (2009 low) are treated as consolidation to 

long term down trend from 2007 high of 2.1161. Rise from 1.4229 is treated as the third leg of such consolidation. Question remains on whether such rise is finished at 1.6746 already and we don't have a clear view on it yet. In any case, break of 1.5780 support will favor the case that GBP/USD has already topped out at 1.6746, after completing a head and should top. In such case, medium term outlook will be turned bearish for 1.3503/4229 support zone. Such move would either be the fourth leg of the consolidation from 1.3503, or resuming long term down trend from 2.1161. On the upside, above 1.6746 will extend the rise from 1.42298 to 1.7043 and above. But we'd expect strong resistance at 50% retracement of 2.1161 to 1.3503 at 1.7332 to limit upside and bring reversal.

Economic Indicators Update

GMT	Ccy	Events	Actual	Consensus	Previous	Revised
0:30	AUD	TD Securities Inflation M/M Aug	-0.10%		0.30%
8:00	EUR	Eurozone PMI Services Aug F		51.5	51.5
8:30	EUR	Eurozone Sentix Investor Confidence Sep		-18	-13.5
8:30	GBP	PMI Services Aug		54.3	55.4
9:00	EUR	Eurozone Retail Sales M/M Jul		0.00%	0.90%