It was another broadly positive day for markets in Europe yesterday with new record highs for the Stoxx 600 and the FTSE250, while US markets also enjoyed a decent pullback after a lacklustre Monday performance.
Concerns that rising infection rates across Asia, and in China especially, appear to be causing anxiety that the rebound story in that part of the world is about to become the weakest link in the global recovery story.
Not only are we hearing about more cases in China, but we are also getting an acceleration of cases across Indonesia and Thailand, as the virus hunts out the parts of the global economy with low vaccination rates.
This hasn’t as yet been reflected in some of the more recent economic data out of China, with this morning’s latest Caixin services PMI for July showing a rebound in economic activity to 54.9, after slowing to 50.3 in June.
There appear to be fewer concerns about economies in Europe, where vaccination levels are higher, although we are seeing some signs that economic activity may have peaked in the short term, with markets here looking set to open higher.
The likes of Spain and Italy will be hoping for a continuation of the strong readings for services economic activity that we saw in June, as businesses there strive to rescue what’s left of the summer tourist season.
Spain services PMI is expected to improve to 63.1 from 62.5, while in Italy services activity is forecast to improve to 58.8 from 56.7.
The recent flash PMIs from the UK and US both saw surprise falls in services activity during July, although it was notable that cost pressures remained at elevated levels.
One reason for the fall in UK services activity, which is expected to be confirmed with a fall to 57.8, is a direct consequence of the so called “Pingdemic”, which hampered the economic activity of employees who were self-isolating due to being “pinged” by the NHS Track and Trace app.
Business optimism about the economy is also declining, especially given ongoing concerns about labour shortages even before enforced employee absences.
In France and Germany while the readings in both manufacturing and services were both resilient, we are also seeing evidence of weakening economic activity, albeit from a fairly high base.
German manufacturing and services economic activity are both above 60, albeit off their peaks but still strong, although the recent flooding may well have seen economic activity fall off towards the end of July.
One notable takeaway from all the reports was rising input costs, which for now don’t appear to be impacting supply chains but could well do so in the coming months.
We also have the warm-up act for Friday’s US payrolls report for July, with the latest ADP employment report, which is forecast to show 695k jobs added, on top of the 692k that were added in June.
Investors will also be paying close attention to remarks from Fed vice chairman Richard Clarida later today after recent comments from permanent Fed board member Christopher Waller that indicated he was in favour of an early move towards a taper given concerns about high inflation. He did caveat his comments by saying that he would also need to see decent jobs reports in August and September for this to be even considered “significant progress”. Nonetheless it does mark a shift given that Fed chair Jay Powell went to great lengths at his most recent press conference not to be pinned down to what he would define as “significant progress.”
Today’s comments by Clarida could be significant in determining where he sits in terms of the timing of a taper, however given the concerns expressed by some Fed officials about the low participation rate, any comments that Clarida makes today may not survive first contact with Friday’s payrolls report, especially if it misses to the downside.
EURUSD – still finding fairly decent support at the 1.1850 area. A fall below 1.1840 could see a move towards 1.1750. As long as we hold above support at 1.1850, we should see a move towards 1.1975.
GBPUSD – remains vulnerable to a drift back to the 1.3820 area, while below the 1.4000 area. A fall below 1.3800 argues for a return to the 1 3720 area. A move through the 1.4020 area reopens a move back to the May highs at 1.4240.
EURGBP – slipped back from the 0.8560 area yesterday. Support remains down near the 0.8500 level. A break below 0.8500 targets a potential move towards the 0.8480 area, and lower towards 0.8280.
USDJPY – while below resistance at 109.80 the risk is increasing for a move through 109.00, with a break targeting the 108.20 area.