Europe
European equity markets have been hit by their relatively strong domestic currencies. The FTSE 100 was edging lower in the morning as a lack of positive news prompted traders to lock in their profits, but the soaring sterling sent the London equity benchmark lower. The scene was set when the US posted inflation and retail sales numbers which came in below expectations, and then when the preliminary University of Michigan consumer sentiment dropped, the FTSE 100 tumbled due to the spike in sterling.
The powerful pound aside, the FTSE 100 would be further in the red if it wasn’t for the likes of Fresnillo (LON:FRES) ,Randgold Resources (LON:RRS), Anglo American (LON:AAL), Glencore (LON:GLEN) and Rio Tinto (LON:RIO). The weakness in the US dollar has pushed up silver, gold and copper prices, which assisted mining companies.
The DAX and the CAC 40 also suffered due to the strength of the single currency but they are not offside as much as the FTSE 100, as the euro gained less ground against the greenback than sterling did.
US
The Dow Jones and S&P 500 are fractionally higher today as traders are playing the bad news is good news game, but it is difficult to get too excited about poor economic updates. The Federal Reserve Chair, Janet Yellen, made it clear the US will continue hiking interest rates but further tightening is some way off. After viewing the latest US CPI, retail sales and consumer sentiment data, traders are pricing in roughly a 43% chance of interest rate hike in December.
Some US equities are trading at or their near all-time highs and investors may not fear an imminent interest rate hike but they find it difficult to get enthusiastic falling inflation levels and feeble retail sales numbers. The decline in the US dollar today is assisting US stocks for now, but it can feel like a hollow rally.
Citigroup (NYSE:C), JPMorgan (NYSE:JPM) and Wells Fargo (NYSE:WFC) all reported second-quarter earnings per share (EPS) that topped expectations.
FX
The GBP/USD traded above the $1.30 mark on the back of the disappointing data from the US. The pound was gaining ground against the US dollar over the past few days as a mixture of dovish commentary from the US and hawkish remarks from the UK pushed the currency pair higher. The signs that US demand is dwindling gave sterling the edge over the US dollar, and there is now a higher probability of a UK rate hike in December than there is from the US.
The EUR/USD took full advantage of the tepid US retail sales and CPI data. On Wednesday the single currency hit its highest level against the US dollar since May 2016, and the currency pair looks as if it is going to retest that level. In the previous two days, we heard Janet Yellen discuss the possibility of gradual interest rate hikes, but now traders feel any plans for further hikes will be pushed back.
Commodities
Gold jolted higher after the disappointing inflation and retail sale data from the US made an additional interest rate hike from the Fed this year less likely. The cooling of inflation and retail sales suggests that demand in the US is sliding and therefore reduces the chances of rate hikes. The headline CPI number fell back to 1.6%, and keep in mind the Fed’s target is 2%, and traders rushed to buy the metal on the back of the news.
WTI and Brent Crude oil rallied on the run up to the US retail sales and inflation data but dropped heavily after the announcement, but then turned around. Falling demand is concerning but the weakness in the US dollar helped the energy market.
US oil production increased during the week and demand in the US now looks shaky. The usual worries about over-supply in the oil market still persist as even Saudi Arabia exceed their output cap. Traders will be keeping an eye out for the Baker Hughes active rig count at 6pm.
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