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Tech leaves a sour taste, as investors look to Apple

European markets started the week on the back foot yesterday weighed down by rising bond yields and some disappointing earnings announcements.

US markets also exhibited similar weakness with the Nasdaq leading the move lower as the cracks in the tech trade that first appeared last week, started to get a little wider, as the tech sector continued to weigh on sentiment, led by Twitter, Netflix and Facebook, which continued to come under selling pressure, as investors start to increasingly question the durability and pace of their subscriber growth models.

The gravity effect also appears to be dragging on Amazon and Alphabet shares which also slipped back.

Apple shares managed to outperform, only declining 0.5%, but only because investors are looking ahead to tonight’s Q3 earnings announcement, but even here there may be cause for concern. Lower average selling prices at its Q2 update suggested that buyers were opting for cheaper models, perhaps indicating that iPhone X sales may have peaked. Whether this is true or not is likely to be difficult to determine given that Q3 tends to be a weak quarter in any case, as it tends to be a precursor to a range of new product launches or updates, which tend to happen in Q4.

Of more importance will be its burgeoning services business, which includes music, games, apps and Apple pay fees, and which has slowly grown in importance, and has seen revenues rise consistently since 2012.    

Over the last few days speculation has grown that the Bank of Japan was considering adjusting its monetary policy stance in order to alleviate some of the strain on bank balance sheets, caused by years of zero, and or negative rates. This prompted 10-year JGB yields to their highest levels in 18 months, at the end of last week, prompting the bank to intervene to push them back down again. With inflation still fairly muted and recent economic data mixed this speculation is unhelpful to say the least, especially given that the bank wants to keep monetary policy easy. This morning’s disappointing economic data was helpful in reinforcing that point, as industrial production slid back sharply in June.

Today’s policy meeting was the perfect opportunity to clarify the central banks intentions with respect to the yield curve, as they left policy unchanged, as well as keeping the ten year yield cap at 0%. They did however introduce more flexibility in terms of how far the yield could move as well as extending their purchases of ETF’s that track the Topix index.

Last week the European Central Bank signed off for its summer break by playing down expectations that we’d see a rate rise much before the end of Q3 next year, and this candour from President Mario Draghi went some way to help push the euro down towards the bottom end of its recent range.

Since then we’ve seen it start to edge back up again despite a strong US Q2 GDP number, which has seen US rates edge back up again, and today’s latest preliminary flash EU CPI number for July could well prompt a further recovery towards the 1.1800 area. Inflation pressures have popped higher in recent months, helped by rising energy prices, however these do appear to have stalled a little, particularly given that core prices dropped below 1% in June to 0.9%.

These are expected to pick back up again to 1% in today’s July reading, while the headline number is expected to stay constant at 2% in the same way that German CPI did in yesterday’s numbers.

EU flash GDP growth in Q2 is also expected to see a slight moderation from 2.5% to 2.2% on an annualised basis with a quarterly expansion of 0.4% confirmed.

One of the stand out items in last week’s US GDP numbers was the US consumer as personal consumption rose 4%, well above expectations of 3%. This is expected to be reinforced by today’s June personal spending and income numbers with both expected to rise by 0.4%, as higher wages start to translate into a more positive US consumer.

With the FOMC already getting set to sit down to discuss monetary policy today and concluding tomorrow, the latest core PCE inflation number of 2% for June is expected to reinforce the expectation of another rate rise next month, with tomorrow acting as another sign post towards that end, as US bond markets start to price 2 more rate rises by year end back into expectations.

EURUSD – trend line resistance at 1.1750 continues to cap the upside and while it does so the risk remains for a move lower, through 1.1620 towards 1.1500. If we do get a move through 1.1760 we could well see 1.1850, with support at 1.1620.

GBPUSD – last week’s rebound stalled at the 1.3220 area and as such we have slipped back a little but for now we’re holding above the 1.3070 area in the short term. While above this support the bias remains for a move towards the 1.3280 area on the back of the bullish reversal off the July lows.

EURGBP – currently bumping up against resistance at the 0.8920 area having rebounded off last week’s lows at 0.8860/70. While below 0.8930 the risk is for a move back to 0.8870. A move back through 0.8920/30 retargets the recent highs at 0.8970.

USDJPY – found support at the 50-day MA at 110.50 last week before rebounding. This is the next key level that should dictate where the US dollar goes to next. We need to recover above the 111.70 area to retarget the 112.20 area.

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