Europe
Stocks across Europe were soft today despite some upbeat earnings from some of the largest companies in the UK as concerns over tightening US monetary policy, an Argentina default and Russian sanctions weighed on confidence.
While terrible news for the Argentine people, the default is likely a non-event in the long run for markets due to the relative unimportance of the Argentine economy and minimal likelihood of bond market spill over. The Argentina default is just another thorn in the side of market confidence today.
Despite a small jump in German inflation yesterday, the weak French and Spanish numbers have seen the flash estimate for Eurozone CPI drop to 0.4% annually. It’s a lagging indicator so the recent drop in EUR/USD from 1.40 to 1.34 should cause relatively higher import prices and increase inflation in the coming months.
It may just be that heading into August there is a certain cyclical element to the current downturn. Some of the players that might otherwise have heavily defended certain price levels in key stocks and benchmarks are in the French Riviera or the Hamptons washing down the catch of the day with their second glass of Dom Perignon.
The FTSE 100 was faring better than its European neighbours after positive reports from Royal Dutch Shell (LONDON:RDSb), BG Group (LONDON:BG) and Lloyds (LONDON:LLOY).
The energy sector, after being dragged through the mud on possible Russian sanctions retaliation was the top of the FTSE after positive earnings from Shell and BG Group.Rolls-Royce (LONDON:RR) and Weir Group (LONDON:WEIR) dragged down the industrial sector after reporting a drop in profits.
US
Stocks in the US suffered from an unusual drop in purchasing manager confidence as yesterday’s strong US data suggesting a rate hike sooner than expected still weighed on stocks.
The Chicago PMI fell to a 12 month low in June dropping 10 points from 62 to 52, the largest drop since the 2008 financial crisis. It’s just one data point but does stand out especially in comparison with the jump in the conference board’s consumer confidence report on Tuesday.
Goldilocks has gone! Growth just became a bit too hot and mummy bear Yellen is going to take away the porridge bowl.
It’s much too early to call a top in stock markets but it has been a while since there’s been a good sized correction of 5% or so in the S&P 500. Undoubtedly some if not the entire rise in stocks over the past few years has been down to financial engineering from the Fed. The prospect of tightening is worrying markets and depending on tomorrow’s unemployment report could do so for the rest of the summer.
Following yesterday’s ADP report miss, unemployment claims rose more than expected after reaching a multi-year low the week prior, both datasets are notoriously poor at predicting Friday’s jobs number.
Increasingly 200k jobs created has become the measure of a decent jobs report. Should the NFP number hold above 200k, that will add further evidence that the US economy is well on the road to recovery and in no longer need of extra-ordinary monetary policy and weigh on markets further. If the ADP proves predictive and the NFP falls below 200, then that might be enough to bring in the dip-buyers.
Shares in Exxon Mobil (NYSE:XOM) fell despite the company reporting a 28% rise in quarterly profits as production dropped.
FX
The US Dollar was mostly stronger today following on from yesterday’s surprise beat in GDP expectations as well as the Federal Reserve acknowledging inflation and paving the way to an eventual rate-hike.
The British pound fell below 1.69 against the US dollar to the lowest in seven weeks after twice failing at 1.72 early in the month as the relative timing of the next rate hike between the two economies becomes more finely balanced. It had been imagined that the Bank of England would raise rates sooner in 2015 than the Federal Reserve but recent economic data from the US has brought that in and sterling is readjusting.
The Australian dollar was seeing some the biggest losses in FX with worrying signs for the local housing market after building approvals collapsed in June by -5%.
Commodities
Gold was again showing some relative weakness in the face of falling stock markets, itself losing as much as $10 on the day and pushing below 1,290 which could open up the way to the June 17 low at 1,260 per oz.
Crude oil markets were mixed with WTI lower and Brent higher as increasing geopolitics offset rising global growth prospects.
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