European equity markets ran out of steam yesterday, weighed down by the receding prospect of an imminent US stimulus deal, after US House Speaker Nancy Pelosi ruled out the prospect of any sort of agreement plan in the next few days.

US markets proved to be slightly more resilient, with the Nasdaq finishing the day higher, while the S&P 500 slipped back, after briefly threatening to retest the record highs from February this year.

With US stock markets just shy of record highs, and no discernible impact on the labour market of the recent expiry of the weekly $600 unemployment enhancement, after yesterday’s positive jobless claims numbers, US politicians appear to lack the incentive to arrive at a quick deal, and as such this procrastination is likely to continue until one of these factors changes negatively.

The robustness of recent economic data has been a nice positive, helping to push US yields up on the day, and even higher on the week, yet there is this continued nagging doubt that US politicians will overplay their hand, and by the time they do get their act together, the US economy could suffer significant damage.  

Asia markets took this negative hand off from the US and have struggled ahead of the weekend, finishing what has still been a positive week, somewhat on the back foot.

Earlier this morning, we got the latest retail sales and industrial production numbers from China for the month of July, and they continue to point to a weak recovery in the region.

Retail sales growth in China hasn’t been the same since the country came out of lockdown at the end of February, though optimism over the July numbers had been increasing given recent positive data from the auto sector in July, as well as reports from the likes of Daimler, and Apple talking of some decent rebounds in their Chinese markets.

Expectations were for a number in the region of 0.1%, which on the face of it still seemed a little on the low side, given the recent decent set of numbers from TenCent, with Alibaba’s numbers set to come later today.

This makes today’s negative reading of 1.1% somewhat of a surprise, and shows that the Chinese consumer still remains quite nervous about coming out of hibernation, with the last time we saw a positive reading being the end of last year, when we saw a gain of 8% for December.    

Manufacturing has performed better relative to the Chinese consumer, rebounding to its best level in almost a decade in the various official and private sector PMI’s. Industrial production rose 4.8% in July, also slightly below expectations.

As such today’s European open is expected to see stocks come in broadly unchanged, with the main focus on the latest iteration of EU Q2 GDP, which is expected to come in unchanged at -12.1%, and US retail sales later this afternoon.

The last two months for US retail sales have seen a significant rebound in US consumer spending, after very weak months in March and April. An -8.7% decline in March was followed by a record -14.7% decline in April.

With the significant fiscal support supplied by the US government and a reopening of the US economy in May, we saw a sharp rebound in US consumer spending. A record rebound of 18.2% in May, followed by another 7.5% in June had raised hopes of a v-shaped recovery, however events in the past few weeks have cast a shadow over those expectations.

The sharp rise in coronavirus cases and rising death toll in the US sunbelt states, along with the reimplementation of local lockdown measures has raised fears that we’ve seen the high point as far as the economic bounce back is concerned, while a sharp fall in US consumer confidence in July, could see US consumers adopt a new safety first approach.

Expectations for July retail sales are expected to see another positive number, of 2%, however there is a high chance that this could well be on the optimistic side, given the sharp rise in virus cases and re-imposition of lockdown measures throughout July.

The flip side of this coin has been the continued improvement in the US labour market, which could suggest the potential for an upside surprise.

EURUSD – squeezed up to the 1.1865 area but has struggled to maintain any sort of traction. We need to push down through the 1.1720 to complete a move towards the 1.1680 area. The 1.1920 area remains a key resistance. 

GBPUSD – while below the 1.3200 area the pound is vulnerable to a break below the 1.3000 area, with support also at 1.2980. A break below 1.2980 opens up the prospect of a move towards the 1.2770 area. We also have minor resistance at 1.3130. 

EURGBP – having managed to hold above the 0.8970/80 area, the euro needs to break above the 0.9080 level to retarget the 0.9130 level.

USDJPY – starting to look better bid with the next resistance now up near the 107.20 area. Support comes in at the 106.20 area with major support below that at 105.20.

 

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