Global equities endured low volatility on Tuesday compared with the stellar run that stocks enjoyed on Monday.
The long-awaited meeting between Donald Trump and Xi Jinping over the weekend gave stock markets a boost at the beginning of the week, and now there is a sense that investors don’t have much to look forward to in terms of major events.
The feelgood factor lingered in Europe and the US yesterday, but it dawned on traders that it's back to the drawing board in terms of trade negotiations. According to President Trump, the new talks kicked off on Monday, so it is clear neither side are wasting any time. The loosening of limitations on Huawei is a step in direction, but the US concerns about intellectual property protection are likely to be a sticking point in the negotiations.
The Trump administration stoked European tensions yesterday, by warning Brussels that it has eyed up $4 billion worth of tariffs on a rage of EU good that includes whiskey, pasta and cheese. The swipe from Trump is in regards a dispute that dates back over a decade and it is in relation to subsidies for the aviation sector. The US economy is in better shape than the eurozone’s, and the last thing that Brussels needs is a protracted trade spat with the largest economy in the world.
The UK economy showed another sign of weakness as the construction PMI report dropped severely yesterday. A reading below 50.0 indicates a contraction, and the June report slumped to 43.1, the weakest reading since 2009. The UK was due to leave the EU in late March, but seeing as large construction projects often overrun in terms of time, it is possible the industry overshot the Brexit deadline.
Oil suffered a major decline yesterday as traders cut their long positions for fear that demand would be weak on account of trade tensions. Oil enjoyed a rally on the run up to the OPEC meeting, and it was hardly a surprise that the oil cartel and its allies decided to extend the production curbs for nine months. The meeting of the major oil producers quickly became old news, and dealers remembered the poor manufacturing numbers from China and Germany earlier in the week, and became concerned that demand is likely to dwindle.
Yesterday, eurozone PPI came in at 1.6% in May, and that was a sharp fall from the 2.6% level in April. If prices are falling drastically at the factory level, it might be an early indication that demand is falling, and that might bring about weaker CPI and growth in the months to come, and should that come to fruition, the European Central Bank might look to loosen monetary policy.
Overnight, the Caixin survey of Chinese services was released, and the reading was 52, and that compares with the May reading of 52.7 in May. Stocks in Asia slipped due to trade worries.
There are a raft of services PMI reports due out from Europe this morning, and the announcements will be released between 8.15am (UK time) and 9.30am (UK time). The Spanish, Italian, French, German and the UK updates will be announced, and economists are 52.7, 50, 53.1, 55.6, and 51 respectively.
The US ADP employment report will be released at 1.15pm (UK time), and the consensus estimate is 140,000, and that would be a big improvement on the 27,000 posted in May. The US jobless claims report will be announced at 1.30pm (UK time) and dealers are expecting 223,000.
At 3pm (UK time), the US factory orders report will be announced, and economists are anticipating a decline of 0.5%. At the same time, the US ISM non-manufacturing PMI reading will be revealed, and it is tipped to cool to 55.9 from 56.9.
The Energy Information Administration report will be announced at 3.30pm (UK time), and US oil inventories are expected to drop by 2.48 million barrels, and keep in mind last week’s report showed that stockpiles plunged by over 12 million barrels. Gasoline stockpiles are expected to fall by 2.17 million barrels.
EUR/USD – has been largely pushing higher since late May, and a break above 1.1400 might bring 1.1448 into play. A move back below 1.1200 might pave the way for the 1.1110 area to be retested.
GBP/USD – has been driving lower since mid-March, and if the bearish move continues it might encounter support at 1.2476 region. The 1.2800 area might act as resistance.
EUR/GBP – has rebounded for over one month, and if it holds above 0.8800, it might bring 0.9000 into play. A move to the downside might bring the 200-day moving average at 0.8782 into play.
USD/JPY – has been in a down trend since late April, and if the bearish move continues it might target the 106.00 mark. Resistance might be found at the 50-day moving average at 109.39.
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