After a poor start to the week, markets in Europe have pulled off their lows as a consequence of two days of strong company updates, helping to push the Stoxx600 and FTSE250 to new record highs.
The big question today as we come to month end is, will the recovery seen in the past two days be enough to see European markets post their six successive monthly gains? At the moment markets in Europe look set to see a slightly lower open, after another Asia session that has seen stocks slide sharply, despite reports yesterday that suggested Chinese regulators were softening their positioning on regulation, over concerns about the extent of the recent sell-off.
If that was the intention of the softening of position it doesn’t appear to be working. The reality is that the recent crackdown by China has let the genie out of the bottle, and confidence appears to have shifted. Ultimately no-one will risk putting money back into markets until regulators in China put some meat on the bones, and for the moment that’s all that they have, the bare bones. The damage to confidence with respect to recent events may already have been done.
We’ve seen a similar trend play out in the US with the Dow and S&P500 both making new record highs yesterday, despite disappointing US Q2 GDP and weekly jobless claims data, although both finished off their highs of the day, and continued to fall after hours after Amazon’s latest numbers disappointed investors. Revenues for Q2 came in short of expectations, while Q3 guidance was also lower than expected, although this also needs to be set into some sort of context. Revenues were still in excess of $110bn at $113bn, while sales for Q3 were expected to be equally as good. They just weren’t good enough.
Somewhat counterintuitively the disappointment over the economic data helped to underpin markets into the close simply on the basis that it pushes back the likelihood that the Federal Reserve will feel inclined to taper its asset purchase program in any way aggressively.
That isn’t to say that the recovery being seen from the pandemic is likely to reverse, simply its likely to take longer and be slightly more drawn out, as the Delta variant continues to create obstacles to a speedier recovery.
While the US Q2 GDP headline number was disappointing, coming in 2% below expectations at 6.5%, the personal consumption component was very strong, rising 11.8%, up from 11.4% in Q1.
This is likely to show up in today’s personal spending data for June, which is forecast to rebound from 0% in May to 0.7%, while personal income is expected to decline -0.3%, an improvement from -2% in May.
The latest inflation numbers, or core PCE which is the Fed's preferred measure of inflation, is expected to rise further, to 4% in June from 3.9% in May. In light of Fed chairman Jay Powell’s comments at his post meeting press conference, this isn’t likely to cause too many ripples, even if it does come in a little hot.
The Fed has made it very clear that while there has been progress on the central bank's policy goals, rate increases were “a ways away” from becoming a reality. This appears to place a high bar to those calling for rate hikes as soon as next year, with yesterday’s disappointing jobless claims numbers helping to reinforce that narrative.
Before this afternoon’s US numbers, we will also get sight of the latest French and German Q2 GDP numbers, with France expected to come out of a technical recession with Q2 GDP expected to improve to 0.8% from -0.1% in Q1.
German Q2 GDP is also expected to reverse the -1.8% contraction in Q1 with a 2% Q2 economic expansion.
On the inflation front, there appears to be little expectation of a significant problem in the preliminary July numbers, despite yesterday’s big jump in German July CPI to 3.1%, on an EU harmonized basis, even as the headline Germany number jumped to 3.8%.
The July estimate for EU CPI is expected to tick up to 2%, while core CPI is expected to soften to 0.7% from 0.9%. The ECB may have a new inflation target, however if today’s CPI numbers are any guide it still seems a very long way from getting close to meeting it.
EURUSD – has continued to push higher, and on course for a move towards the 1.1975 area. Support now comes in at the 1.1850 level, with further support at the 1.1750 level.
GBPUSD – continues to move towards the 1.4000 area, now that we’ve moved through the 1.3920/30 area, which should now act as support. A move through the 1.4020 area reopens a move back to the May highs at 1.4240.
EURGBP – hasn’t been able to break below the 0.8500 area, as of yet, making us susceptible to short squeezes. A break here targets a potential move towards the 0.8480 area, and lower towards 0.8280. Resistance now comes in at the 0.8580 area.
USDJPY – continues to drift back towards the 109.00 area. A break below 109.00 opens up the 108.20 area. We now have resistance at the 109.80 level, and behind that at 110.20.
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