European and US stocks enjoyed a decent push higher yesterday, and Asia has followed suit this morning, helped by a combination of factors.
Firstly, a downgrade of global growth expectations by the IMF encouraged the expectation that central banks would in all likelihood step in with further measures to support the global economy in the weeks and months ahead.
Secondly, earnings announcements from a variety of companies across different sectors, including banking and tech turned out to be largely better than expected.
Thirdly, reports that US, China trade talks are set to restart next week as US negotiators look to bed down the conditions required to arrive at a longer-term solution, also helped give sentiment a boost, even though the likelihood of an imminent trade agreement has moved much further away
In a way a delay here probably suits the timeline of President Trump in the context of his campaign to get re-elected next year. Not only has the prospect of further tariffs on Chinese goods become less of a risk but the US President can focus on getting the US, Canada, Mexico deal passed through the legislature, so that he can at least keep open the possibility of a victory on the China trade front in the lead up to next year’s election.
The US dollar also enjoyed a fairly decent day yesterday, aided by reports that a two-year deal to raise the US debt ceiling appears to have been agreed between the Trump administration and US lawmakers. The greenback also got a lift from an IMF upgrade to the US growth forecast for 2019 to 2.6% from 2.3%.
The pound slipped against the US dollar but performed much better elsewhere, confounding expectations of further losses after Boris Johnson was confirmed as new Conservative party leader. He can now expect to be confirmed as UK Prime Minister later today once Theresa May heads off to Buckingham Palace after PMQs to tender her resignation to the Queen.
Soon after that we’ll get a flavour of the style and type of government Johnson tends to run as he gives a speech on the steps of Downing Street, as in his words he seeks to Deliver Brexit, Unite the country, Defeat Jeremy Corbyn and energise the country, or Dude for short.
While Boris certainly has a way with words, he’ll also now have to deliver on them, particularly since he’s left himself so little room for manoeuvre in saying the UK has to leave on the 31st October. If he fails on that score, there will be a lot of unhappy Brexiters asking “Dude, where’s my Brexit”
The euro on the other hand, has started to slide quite sharply in the last few days, undermined by declining growth expectations, the IMF downgraded the euro area economy again yesterday, ahead of tomorrow’s ECB rate decision.
Today’s flash manufacturing and services PMIs from France and Germany could prompt further weakness this morning if the weakness seen in the manufacturing numbers in recent months starts to bleed into the services sector, in France and Germany.
As far as manufacturing is concerned Germany has been in recession all of this year, and July isn’t expected to see material change to that, with a slight improvement to 45.1 expected, while French manufacturing is expected to come in at 51.6, down from 51.9.
The services sector thus far has been the one saving grace this year with fairly strong numbers in Germany, coming in at 55.8 in June, however this is expected to slip modestly to 55.3, while French services is expected to slow to 52.7 from 52.9.
EURUSD – continues to look soft and set to close in on the 1.1110 support area and May lows. A push through here opens up the 1.1000 area. We need to see a recovery back above 1.1280 to retarget the 1.1400 area.
GBPUSD – has continued to slip back but has managed to hold above the two-year low from last week at 1.2380. Needs to hold above here to argue for a move back to 1.2580, or risk a deeper move towards the 1.2100 area.
EURGBP – after last week’s failure at 0.9050, needs to take out the 0.8950 area to argue for a deeper move to the 0.8870 area. Currently have minor resistance at 0.9000.
USDJPY – continues to edge higher but needs to take out the 50-day MA which capped it earlier this month. For the rally to gain momentum we need to push back through the 108.80 area to retarget a move to the 109.20/30 area. Bias remains to the downside and the 106.00 area, while below the 109.20 area.
FTSE100 is expected to open 6 points higher at 7,561
DAX is expected to open 40 points higher at 12,530
CAC40 is expected to open 15 points higher at 5,633
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