When is a deal not a deal? When it’s something that’s spun by a president of the United States and the president of the EU Commission; yet to see the way markets reacted early yesterday, and the DAX in particular, which closed at a five-week high, it was almost as if the EU and the US were best buddies again.
Nothing could be further from the truth, and while the prospect of tariffs on European cars has diminished, it hasn’t gone away completely, which means inevitably the market shifts its attention elsewhere. That elsewhere concerns what could happen next with respect to China, and the prospect of an escalation there.
While European markets had a decent day, US markets were slightly more mixed with the Nasdaq falling sharply as the Facebook hangover weighed on the entire tech sector, and also acted as a drag on the S&P500. The social media giant has had a year to forget so far, starting with the fallout from the Cambridge Analytica scandal, concerns about GDPR and yesterday it posted its worst day ever, and the US stock markets worst ever one day loss, losing $120bn off its market value.
Fears that Amazon was set to go the same way were soon put to bed when the company blew away profit expectations after the bell, posting profits of $5.07c, well above the $2.48c which was expected, with profits a lot of the gains being driven by the company’s cloud services division. Rather strangely revenues came in slightly light at $52.7bn. Despite this the shares traded higher after the bell, which if sustained would wipe out yesterday’s 3% decline.
A quirk in the way the June ECB statement was translated caused some constructive ambiguity as to what the phrase “through the summer” meant in the context of expectations around the timing of when to expect the first ECB rate rise in 2019.
Yesterday’s clarification that “at least through the summer” means exactly that and means that it is unlikely that we’ll see a move in any of the ECB’s main reference rates, before the second half of next year, and probably towards the end of Q3, with September 2019 the most likely month.
This clarification, along with a fairly upbeat outlook for the European economy, is likely to keep the upside on the euro fairly limited, and now throws the focus on to today’s first iteration of US Q2 GDP which, when all is said and done, is expected to have much more influence on the next move in the euro, than anything the ECB might say and do in the next few weeks.
A strong US GDP number today could well be the next catalyst for further euro weakness, and more or less confirm the prospect that the Federal Reserve remains on course for another two rate rises this year. This in turn could well prompt more angst from the US President about the strength of the US dollar, and accusations that the European Central Bank is deliberately manipulating its currently lower, especially if it serves to push the greenback towards the highs of earlier this month.
There is a wide range of estimates around todays interim Q2 GDP number ranging from 3.5%-5%, with market pricing something in the region of 4.1%. Given the strength of the US jobs market, the stimulative effects of the January tax cuts, and the increase in US consumer spending, there is an argument for a number towards the upper end of estimates, at around 4.5%. If we do come in anywhere near here then that should be US dollar positive, as markets price in further tightening.
On the other hand, the increase in trade tensions which has worried some US business, as well as fairly subdued wage growth, and rising inflation due to high gasoline prices, could take the edge off and see us come in below 4%, which could put downward pressure on the US dollar.
EURUSD – the failure to overcome the 1.1760 trend line resistance is likely to keep the euro under pressure in the short term. If we do get a move through 1.1760 we could well see 1.1850, with support at 1.1620.
GBPUSD – yesterday’s move higher stalled at the 1.3220 area and we could slip back towards 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 last Friday’s bullish reversal.
EURGBP – still above the 8870 support for now after this week’s slide from last week’s peak at 0.8970. We should now find resistance at the 0.8920 area with the risk we could see a move below 0.8870 and head back towards 0.8820.
USDJPY – found support at the 50-day MA at 110.50 yesterday before rebounding. This is the enxt 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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