Despite another record high for the S&P500 US markets finished the day slightly lower yesterday, on what turned out to be a fairly quiet and uneventful day for equity markets.
European markets on the other hand managed to consolidate and build on the gains of last week, spurred on by the promise of a combination of lower for longer interest rates and weaker currency which helped push the German DAX and the FTSE 250 to their best levels this year.
The US dollar, which had dropped sharply in the last week of July, continued to gain ground from its Friday rebound as yield differentials continued to move in its favour.
Whether or not the Federal Reserve moves on rates in September is hardly the point at this stage, the dollar is merely benefiting from the perception that the US central bank is one of the only central banks at this point in time that won’t be easing monetary policy for the foreseeable future.
Yesterday’s rebound was also aided by the continued rally in oil prices on speculation that we could well see OPEC come to an agreement on an output freeze next month in Algiers. While it’s certainly true that we’ve heard this story before, it was enough to prompt some caution from a market that had seen a 20% decline in the June highs.
The fact that neither Russia, or Iran for that matter are likely to back such a freeze makes any prospect of an agreement unlikely, and that’s before you consider the US shale producers who have seen rig counts steadily increase over the past few weeks, as more production capacity comes on line.
Inventories for both oil and gasoline still remain at fairly elevated levels, and it is quite likely that it will take considerably longer for this overhang to come down than was originally thought a few weeks ago. Today’s inventory data from the API is expected to show further draws in US inventory levels for gasoline and crude stocks as US driving season comes into its final month.
Overnight that latest Chinese inflation data pointed to a slight slowdown in July, rising 1.8%, down from 1.9%, though factory gate prices did improve from -2% to -1.7%, with food prices once again fluctuating quite sharply.
Later today we get another snapshot of the UK economy with the latest industrial and manufacturing production numbers for June, which could well give us an insight as to whether the 0.6% GDP number for Q2 might see a downward revision in the coming weeks.
After a pretty poor May performance which saw declines of 0.5% for both the expectation is that we’ll see an improvement to 0.1% for industrial production and -0.2% for manufacturing.
The UK trade balance for June is also expected to come in at -£2.5bn, unchanged from May.
We’ll also get an early estimate of UK GDP for July from the NIESR which is expected to show a slight moderation from the 0.6% seen in June to 0.4%.
Yesterday we found out that consumer spending in July appeared to hold up fairly well in the aftermath of June’s Brexit vote, as data from Visa showed that UK consumer spending rose 1.6% higher than the same period a year ago, as well as the best month on month gain since January this year, which suggests that there was no Brexit hangover here.
Data from the British Retail Consortium appears to show a similar story with like for like sales showing a rise of 1.1% for July as warm weather and the start of the summer holidays helped boost spending in the best single month performance since January.
Some economists have warned that it remains too early to draw any meaningful conclusions from what is a decent set of numbers but in many cases these are the very same economists who are claiming that sentiment and confidence have fallen off a cliff in the wake of the Brexit vote. Well, they can’t have it both ways, either business or consumer confidence surveys have fallen off a cliff, or they’ve taken a temporary knock.
Ultimately it is too early to draw too many conclusions about events of the past few weeks which makes it all the more strange that the Bank of England has acted in the way that it has with respect to last week’s surprisingly aggressive easing measures.
EURUSD – last week’s failure to overcome the 1.1250 area has seen the euro fall back and fall below the 1.1100 area, but we have found some support around the 1.1040 level. We also have support at 1.0950. We need a move beyond 1.1250 to open up a retest of the June highs at 1.1400.
GBPUSD – continues to come under pressure undermining the positive scenario in the process by falling below the three week lows at 1.3060 last week. Currently struggling to rally with any conviction suggesting that the risk now is for a move towards the 1.2800 lows. A move below the lows last week at 1.3020 would be the first sign of this type of move.
EURGBP – needs to push through the 0.8500 level, to raise the prospect of a move towards 0.8600. Until we do we remain vulnerable to a pull back to the lows last week at 0.8360.
USDJPY – continues to edge higher after finding support at the 100.60 level last week, but we need to push beyond the 103.50 area to stabilise. The risk remains for a move back towards the lows at 98.90 on a break below the July lows at 99.99.
Equity market calls
FTSE100 is expected to open 11 points higher at 6,820
DAX is expected to open 13 points higher at 10,445
CAC40 is expected to open 3 points higher at 4,418
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