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Europe to follow Asia lower


Stocks are in the red in Asia as Japan revealed that household spending swung from 0.7% in May to 1.5% in June, and traders were anticipating a decline of 0.1%.

Unemployment fell to 2.8% in June, from 3.1% in May, and that came in below expectations of 3%.  Inflation remained steady at 0.4% - meeting economists’ estimates. The numbers married up with the Bank of Japan’s outlook.

The Dow Jones, S&P 500 and NASDAQ 100 all registered new record highs intra-day yesterday but only the Dow Jones finished in positive territory. The update from the Federal Reserve on Wednesday didn’t make traders fearful of an interest rate hike in the near-term, and that contributed to the broader bullish sentiment. Even the start of the unwinding of the Fed’s balance sheet is dependent on strong economic indicators. Seeing as the US saw a rise in jobless claims, and only a small increase in durable goods sales excluding transports in June, investors aren’t even worried about the prospect of the balance sheet reduction in the near future.

The US growth rate figures for the second-quarter will be posted at 13.30BST and the consensus is for 2.6%. The growing perception that the Fed will not raise interest rates again this year is driving down the US dollar, and is assisting the US stock markets. The US central bank is already divided over as to when to begin the process of unwinding the balance sheet, and without a strong growth number, they would be unwise to rush into it.

Amazon shares fell in post-market trading after it revealed a 77% decline in profits. Revenue for the second-quarter jumped by 25%, but it was the rise in costs that weighed on earnings. The company predicts it will have a negative net income in the current quarter, as money is being plough into other areas of the business like creating content for the Amazon Prime service. 

Barclays, BT and Rightmove will be the ones to watch from the UK reporting season. Investors in Europe have been harder to impress when it comes to earnings. Lloyds saw first-half profits rise, and even though it put aside £1 billion for provisions to be paid to clients, the bank took another set in the right direction, but the stock still finished lower yesterday. During the week, Ryanair revealed a jump in profits, but dealers latched onto the announcement that air fares could fall by up to 9%, in a bid to stay competitive. It seems you just can’t will with European investors. 

Germany will announce its inflation figures for July at 13.00BST, and economists are expecting it to fall to 1.5% from 1.6% in June. Eurozone equity markets have been shaken recently over the prospect of the European Central Bank decreasing its stimulus package, and the euro gained ground for the same reason.

EUR/USD – is in a solid upward trend and the next level to watch is the 200-week moving average at 1.1796, and a break above it would put 1.2000 on the radar. Pullbacks could find support in the 1.1612 to 1.1583 region. Should we see a drop below that area, 1.1479 would be brought into play.

GBP/USD – while it holds above 1.3000 the outlook will be positive, and buyers will look to 1.1359 and 1.3200. A move through 1.3000 could see it return to the 50-day moving average at 1.2897.

EUR/GBP – 0.8900 is providing support, and if the level holds, the resistance at 0.8995 and 0.9049 will be the upside targets. A break below 0.8900 would bring the support at 0.8832 into play.

USD/JPY – 110.62 is providing support and the upside target is the 200-day moving average at 112.15, and beyond that traders will look at 112.46. A break below 110.62 would bring the support at 110.00 and 109.00 into play.


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