Europe
The biggest daily decline in Chinese stocks for three weeks coupled with sliding commodity prices and a mixed set of corporate results had European investors stepping to the sidelines on Tuesday.
The FTSE 100 slid back to yesterday’s low just beyond 6,500 as mining stocks and energy shares again suffered at the hands of sliding metal and oil prices with shares of Persimmon (LONDON:PSN) also down after badly-received earnings. Utilities Severn Trent (LONDON:SVT) and United Utilities were two of only a handful of gainers as investors sought safe-havens from declines in high-growth sectors.
The German DAX was tussling with its 200 day moving average around 10,900 with a slightly weaker euro not enough to offset broad China-induced weakness led by utility company RWE after a number of broker downgrades.
Data showing rising house prices in China during July could hamper the ability of the People’s Bank of China to cut interest rates for risk of blowing air back into a housing bubble. China’s economy is still in a rough patch despite a number of cuts to interest rates and bank reserve ratios so anything that could prevent further cuts will weigh on the stock market.
The UK consumer price index declined less than expected in July, leaving a yearly rate of inflation of 0.1% and 1.2% when energy prices are stripped out. Rising wages appear to be building underlying price pressures in the UK economy, something the Bank of England has been waiting for before it begins normalising monetary policy.
US
US stock markets opened lower on a negative read-across from a slump in Chinese shares, underwhelming housing data and a mixed set of corporate earnings that saw Wal-Mart (NYSE:WMT) disappoint and Home Depot beat expectations.
Wal-Mart shares dropped over 2.5% after profits fell below estimates and the discount retailer offered full year guidance lower than average estimates. Sales were slightly ahead of estimates but Wal-Mart’s decision to increase wages this year has hit profitability.
FX
The US dollar was mixed after inconsistent housing data showed the highest number of housing starts since 2007 and a higher revision to last month but a massive plunge in building permits of -16%.
Sterling was the big mover in FX on Tuesday after a surprise leap in core prices brought a 2015 rate hike back into view. The pound rallied because if the Bank of England is truly looking through the fall in energy prices, a core price increase to 1.2% is a significant rise in price pressures from 0.9% previously and puts a 2015 rate hike back on the table. GBP/USD broke above 1.57 to a six week high.
A big 1% decline in EUR/GBP after the strong UK CPI data dragged EUR/USD down with it, making the euro appear soft despite lacklustre US economic data.
Commodities
Crude oil traded lower on Tuesday and hovered just above multi-year lows after Algeria’s oil minister suggested a cut in production by OPEC would not be enough by itself to stabilise the market. API stockpile data is due out Tuesday.
There was a clear divergence between gold and silver prices. While Silver plummeted alongside copper which made a new five year low, gold prices held steady at around breakeven on the day. Silver’s industrial usage leaves it more exposed to the slowdown in China whilst gold has attracted more safe-haven flows as a hedge against weak stock markets.
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