A strong day for both Europe and US markets yesterday, saw yet another record finish for the Dow last night helped in no small part by slightly improved Chinese Q2 data, as well more M&A activity, and a fairly upbeat Beige Book economic survey from the Federal Reserve.
The Fed survey painted a fairly optimistic picture of growth in all of the twelve Fed districts. The report showed that the economy is expanding at a modest or moderate pace, with manufacturing activity rising, and consumer spending also rising, which does appear to run contrary to recent data showing slowing retail sales data.
Both can't be right.
While the Dow 30 and Nasdaq 100 continue to make new highs it is notable that the S&P 500 and the Russel 2000 were unable to do so, with the Russell 2000 in particular finishing sharply lower.
Today's European markets are expected to open slightly lower, not altogether surprising given yesterday's strong gains, with investors focussing back on the latest announcement of new US and EU mandated sanctions against Russia over their role in the unrest in the Ukraine, as tensions rise once again, between the various governments with Russia's Putin warning of a "dead end" in business relations, between the US and Russia.
We also have the final June EU inflation number, which is expected to be confirmed at 0.5%.
With the ECB currently hamstrung in its attempts to weaken the euro by conventional and unconventional means, ECB President Draghi this week resorted to trying to talk it lower and jawboning that the ECB remained prepared to act further with QE, if required.
He insists that QE is within the banks mandate and would be used if required, but this claim remains barely credible given the huge legal and political obstacles to implementing it.
For now Draghi appears to be playing for time in the hope that the US economy will do the heavy lifting for him, and in the process force the Federal Reserve to tighten monetary policy.
Janet Yellen's second day of testimony to lawmakers on Capitol Hill went pretty much the same way as the first with her giving away few clues about when the Fed would look at a change in rates, not surprising given the continued patchy nature of the data, and weak wage growth.
US bond markets still remain pretty sanguine about the prospects for higher rates, with the two year yield still holding below 0.5%, but the US dollar does appear to be starting to edge higher again, with the US dollar index pushing back towards its June highs.
It's a similar story in the UK, though with UK 2-Year yields at 0.86% the prospect of a rate rise looks closer than in the US, though yesterday's disappointing average earnings numbers do appear to have pushed back the prospect of a rate hike into next year, at the earliest.
US economic data out today consists of weekly jobless claims which are expected to come in at 310k, up slightly from 304k last week. Housing starts in June are expected to rise 2.4%, up from a 6.5% decline in May, while the latest Philadelphia Fed survey for July is expected to come in at 16, down from 17.8 in June.
EUR/USD – currently testing trend line support from the 2012 lows at 1.3520. If we break below the 1.3500 level we could well see further losses towards the November 2013 lows at 1.3300.
While key support remains intact at 1.3520 we remain susceptible to a short squeeze back towards 1.3600.
GBP/USD – sterling dips continue to be shallow but while we remain below 1.7200 the risk remains for a test back towards the lows this week at 1.7055. This means that we could still get a move back through 1.7040 towards 1.6910. Only a move above 1.7180 would undermine this scenario and run the risk for further gains towards 1.7330. 1.7330 is the 50% retracement of the decline from the 2007 highs at 2.1160 and the lows at 1.3500 in 2009.
EUR/GBP – another 18 month low yesterday at 0.7890 sees the pressure sustained on the downside. While below the highs this week at 0.7980 the risk remains for further losses towards 0.7880 and then 0.7780. We also have trend line resistance from the March highs, at the 0.8035 area.
USD/JPY – only a move through 101.80 targets a move towards 102.10 and remains a key pivot within the broader between 101.20 and the range highs just below 103.00. Intraday resistance sits at 101.80.
Equity market calls
- FTSE 100 is expected to open 16 points lower at 6,768
- DAX is expected to open 19 points lower at 9,840
- CAC 40 is expected to open 12 points lower at 4,357
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