After a two day decline at the end of last week US markets embarked on a strong rebound yesterday, helped by a rebound in commodity prices and some more M&A activity after Warren Buffett’s Berkshire Hathaway (NYSE:BRKa) announced it would acquire aircraft equipment maker Precision Castparts Corporation (NYSE:PCP), while comments from Federal Reserve Deputy Chairman Stanley Fischer that there would be no rate hike until the Fed sees inflation returning to normal, also helped.
European markets also had a good day as the prospect of some form of Greek deal continued to loom on the horizon, though a number of obstacles could well derail any progress, not least disagreement between Germany, and the rest of the creditors, as well as the IMF, who think the latest bailout will need to be in the region of €90bn, given the recent problems in the Greek economy.
The only outlier was the performance of the FTSE100 which lagged slightly behind its European peers over concerns about the effect of lower commodity prices, and weaker Chinese economic data, given its heavy commodity weighting.
An overnight surprise move by the People’s Bank of China to weaken its remnimbi trading band by 2% caught the market off guard overnight, putting a brake on the rebound which seems rather counterintuitive given that it serves as merely another mechanism to stimulate its weak economy. While the knee jerk reaction has been somewhat negative as the markets absorb what this move means given that most people had been expecting further triple R cuts or interest rate reductions, the fact remains the Chinese currency has gained sharply against the euro in particular in recent months.
Last week’s decision by the Bank of England to hold rates at record lows wasn’t a surprise, but the split on the MPC with respect to calls for a rise in rates was. The expectation had been that we would get more than one dissenter, and the fact that we didn’t would appear to suggest that the other possible hawk, Martin Weale, felt that the UK recovery could be starting to look a little fragile.
Certainly some of the recent data would appear to support that view, despite stubbornly low inflation pressures, helping boost consumer incomes. Even the normally buoyant services sector showed some signs of slowing down in July, and this morning’s BRC retail sales numbers for July which slipped back to 1.2% would appear to suggest that consumers continue to remain cautious.
The direction of travel of the German ZEW investor expectations index over the past few months has been distinctly underwhelming, declining from peaks in March of 54.8 to July lows at 29.7, its lowest level since November last year.
The performance of the DAX since the beginning of July has been largely positive, up over 8%, which would suggest that we could well see a similar turnaround in investor expectations, as concerns about a Greek exit diminish as talks about a third bailout continue their progress. Expectations are for a rebound to 31.1 in August, given last week’s improvement in the latest PMI numbers.
EURUSD – continues to trade in a sideways range, after failing to push below 1.0850 last week. A concerted move through 1.1030 is needed to retarget the high of a fortnight ago at 1.1125, while a move below 1.0800 could well signal a move towards 1.0600.
GBPUSD – the pound had a disappointing week last week and we could fall back towards the converging 100 and 200 day MA at 1.5370, but we still remain within the broader range of 1.5400/1.5700. The high of the last five weeks at the 1.5680 level remains a key resistance on the upside. A move above 1.5700 has the potential to retarget the 1.5820 level.
EURGBP – after failing to push lower last week we could well see a rebound to the 0.7120 area if we manage to hold above the 0.7020 area. The 0.6930 lows remain the key obstacle to further losses towards 0.6830.
USDJPY – Friday’s failure to break through the 125.00 area prompted a sell-off back which could well see a move back towards the 123.75 area, and then 123.00. Only above 125.00 argues for a retest of the highs at 125.85.
Equity market calls
FTSE100 is expected to open 12 points lower at 6,724
DAX is expected to open 36 points lower at 11,568
CAC40 is expected to open 19 points lower at 5,176
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