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Europe set for lower open as Q3 gets off to a slow start for China

China economy slows

Last week saw more record highs for European stocks with the DAX, joining the FTSE250 and the Stoxx600 in new territory, with the CAC40 not too far behind as it closes in on its own previous record peaks set at the beginning of the millennium.

There appears to be very little evidence that rising delta variant cases in the Asia region are causing markets anything close to anxiety or sleepless nights, although optimism over the recovery story in the US did take a hit on Friday afternoon after Michigan consumer confidence hit a ten-year low.

This didn’t prevent US markets from joining in with new records for the S&P500 and Dow Jones, although it did knock the US dollar sharply lower, as markets adjusted their timeline for a possible tapering of bond purchases towards the end of the year.

As a consequence of Friday’s weak consumer confidence number US 10-year yields ended up finishing the week lower, having spent most of the week in solidly positive territory. It seems quite a significant over-reaction on the basis of one piece of data, and a sentiment-based piece of data at that.

The main focus this week is expected to be on the latest Fed minutes, which are due on Wednesday, and US retail sales data for July, which is due tomorrow. A weak consumer number tomorrow could well undermine recent optimism in the US recovery story as we look ahead to Q3, and build on the Q2 rebound.

While the discussions over the tapering of bond purchases are expected to dominate this week, anything that was discussed at the recent Fed meeting has already been overtaken by recent events, namely the two recent strong jobs reports, the upwardly adjusted June report as well as the strong July report.

Furthermore, any doubts about the strength of the US recovery, and particularly the US consumer, will only exacerbate concerns about the resilience of the global recovery as a whole, given concerns about a slowdown in the Chinese economy which this morning showed further signs of increased fragility.

Recent China trade data appeared to suggest that internal demand within the world’s second largest economy is already on the wane, and today’s retail sales and industrial production numbers would appear to confirm some of that anxiety. The trade numbers for July showed that the Chinese economy got off to a weak start to Q3, as exports fell to their lowest levels this year.

Imports were weaker in July, while the recent floods across China may well have impacted demand, along with rising Delta variant infections. The rise in delta infection rates has already prompted Chinese authorities to reimpose rolling lockdowns across the country, an act which is likely to reduce aggregate demand further.

All of these factors appear to have been confirmed with this morning’s July retail sales which slid sharply, coming in at 8.5%, down from 12.1% in June, and much lower than estimates of 11.5%. Industrial production also slowed sharply to 6.4%, down from 8.3%. This slowdown is unlikely to be a one-off given that China appears to be adopting a zero-Covid policy, a policy that given the highly infectious nature of the delta variant will probably be difficult to achieve.

It’s also set to be an important week for the pound with the release of the latest inflation, unemployment and retail sales data. The recent hawkish tilt by the Bank of England has given the pound an added buoyancy recently, and some decent numbers this week could act as a tailwind for GBP bulls, after recent weakness.

This morning’s weakness in the latest economic data from China amid concerns over the recovery appears to have acted as a drag on sentiment in Asia, and this looks set to translate into a sharply lower European open     

EURUSD – having rallied off the twin lows of 1.1704, and subsequently seen a move back above 1.1770, we need to push back through the 1.1830 area to mark a return to the 1.1900 area.   

GBPUSD – recovered from just above the 1.3780 support level, however to stabilise and signal a return to the range highs we need to break above the 50-day MA at 1.3870 and target a return to the 1.3950 area. Support remains back down at the 1.3780/90 area.    

EURGBP – ran into resistance at the 0.8520 area, after last week’s rebound off the 0.8450 level last week. While below 0.8510/20 we still have the potential to move lower towards the 2020 lows at 0.8280. The euro needs to recover back above the 0.8510/20 level to stabilise and squeeze back towards 0.8580. 

USDJPY – last week’s failure at the 110.80 level has seen the US dollar slip back sharply, below 110.20, through 109.80 and could well see a retest of the 109.20 area, and last week's low at 108.75.

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