Since the disappointing US jobs report at the beginning of the month, confidence in the broader recovery story has started to ebb away, and ergo so has confidence in the outlook for stock markets more generally.
The S&P 500 posted its lowest close in the last two weeks, while markets in Europe have lost ground for two weeks in a row, while the Nasdaq also appears to be starting to look a little top heavy, although in the bigger scheme of things the declines of the past four days have been very modest.
For US investors the main concern appears to be a slowing economy coming at a time when inflation appears to be showing little sign of slowing down, and after US PPI for August saw yet another record high in data released at the end of last week.
With the US Federal Reserve due to meet next week, and the narrative clearly moving towards a tapering of asset purchases sooner rather than later, there appears to be a build up in anxiety that the continued rise in inflationary pressure may well be much more persistent than central bankers would have us believe, with the resultant rise in yields and rebound in the US Dollar.
While factory gate prices appear to be showing no sign of slowing down, in the US, as well as China where authorities released strategic reserves in an attempt to keep a lid on crude oil prices, after PPI hit a 13 year high, there is a fear that rising CPI will continue to heap pressure on consumer spending, and act as an additional drag on economic growth.
This correlation could see further confirmation this week with the latest US and UK CPI and retail sales numbers for August. In July both UK and US consumer prices saw a pause as some base effects dropped out of the headline numbers, and while there is some expectation that this might continue in August, this appears to be more of a hope than anything else, and doesn’t appear to be being reflected in US 10-Year yields, which have risen for three weeks in succession, posting its highest weekly close since mid-July.
The decline in confidence also appears to be hitting US consumer confidence and retail sales, which both fell back in July, and with consumer confidence falling further in August, we could see a similar decline in August retail sales as well.
It’s been a slightly different story for markets in Asia which have seen a pick up in the last two weeks, however the recovery being seen in the Nikkei 225 and Chinese markets are merely pullbacks from the declines that we’ve been seeing over the last three months, and concerns still remain there as Chinese regulators mull crackdowns on various sectors.
Today’s European market open looks set to carry on from the weakness that we saw at the end of last week, with a lower open as Asia markets slip back on reports that Chinese authorities want to break up Alipay, and separate it from Ant Group's (HK:6688) wider business.
EURUSD – holding above support at the 1.1800 area and 50-day MA for now, with a break below opening up the potential for a move towards 1.1750 and previous lows at 1.1660. Resistance remains at the 1.1910 area.
GBPUSD – the pound was rebuffed at the 1.3900 area last week, but found support at the 1.3725 area. As long as we hold above trend line support from the August lows at 1.3750 then the upside potential remains intact. A move through 1.3900 targets 1.4000.
EURGBP – the failure at the 0.8610 area last week saw a retest of the 0.8520 level. We need to recover back through 0.8560 to retarget 0.8610. Below 0.8520 retargets 0.8480.
USDJPY – finding resistance at the 110.50, we could see a retest of the 109.10 area and trend line support from the April lows. Above 110.50 targets 111.00.
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