PMIs Key as Greek Talks Continue

Taking the lead from the US and Asian sessions overnight, the FTSE is pointing to a lower open on Friday, potentially signalling some profit taking and risk aversion ahead of the bank holiday weekend.

A lot could happen between now and Tuesday with talks continuing between Greece and its creditors and that makes investors quite nervous. There appears to have been some progress in recent days with Greece showing a willingness to make some concessions, while the sidelining of Finance Minister Yanis Varoufakis won’t have done any harm either.

A deal needs to be done soon, Greece appears to be on the brink of running out of cash and some large repayments to the IMF are due. It needs to repay €200m of IMF loans today while a further €763m repayment is due on 12 May, coincidentally enough the day after the next eurogroup meeting.

Reports yesterday of a delay in pension payments suggests Greece does not have much time left. A computer glitch was blamed for the delay although one official claimed there was no glitch and in fact they were just missing several hundred million euros which had to be scrambled together. With that in mind, it’s no wonder Varoufakis was sidelined and Tsipras has started to make concessions.

But none of this guarantees a deal will be done and that’s going to make investors a little nervous ahead of the long weekend which is why I expect this risk aversion to grow as we move through the session. We’ve seen plenty of examples in recent years of things drastically changing over the weekend and markets responding in their usual panicking manner when they reopen. There’s no reason to think that won’t happen again.

Mixed data overnight from China and Japan isn’t really helping sentiment either. China’s official manufacturing PMI remained steady at 50.1 in April, barely managing to remain in growth territory. The non-manufacturing PMI fell slightly to 53.4, providing further evidence of the ongoing slowdown in the Chinese economy. The stimulus efforts from the People’s Bank of China seem to be doing very little and much more may be needed if the country is going to hit its already low 7% target this year. I think further rate and reserve requirement ratio cuts in the coming months is extremely likely.

There were mixed numbers from Japan, where core CPI rose only 0.2% when the effects of last year’s sales tax hike are stripped out. The country really is resisting all efforts from the government and central bank to lift inflation to 2%, companies aren’t raising wages and consumers aren’t spending. The Bank of Japan is going to have to do something and the chances are that will come later this year in the form of more quantitative easing. Whether that will be enough is unclear, clearly the task facing them is far bigger than they first anticipated and the sales tax hike has been a massive set back.

Markit will release the UK manufacturing PMI reading for April this morning, which is expected to show a small improvement, rising to 54.6. We’ll also get the latest manufacturing PMI reading from the US later, as well as the ISM manufacturing PMI and the UoM consumer sentiment readings for April.

The FTSE is expected to open 18 points lower.

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Craig Erlam
Based in London, England, Craig Erlam joined OANDA in 2015 as a Market Analyst. With more than five years' experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while conducting macroeconomic commentary. He has been published by The Financial Times, Reuters, the BBC and The Telegraph, and he also appears regularly as a guest commentator on Bloomberg TV, CNBC, FOX Business and BNN. Craig holds a full membership to the Society of Technical Analysts and he is recognized as a Certified Financial Technician by the International Federation of Technical Analysts.