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Equity weakness continues, UK and US retail sales in focus

CMC Markets

Stock markets in Europe and the US endured severe declines yesterday as the worries about the state of the global economy grew. 

The German economy contracted in the second-quarter by 0.1%, which admittedly isn't massive, but a contraction nonetheless is concerning, and there is increased speculation the country is heading for a recession.

The negative growth in Germany is the latest in a string of negative news stories this week. Europe is already facing major problems as political uncertainty in Italy rumbles on, and the chatter of a no-deal Brexit is still doing the rounds. Germany is the driving force of Continental Europe, and region could be in for a flat type.

Stocks in Asia fell overnight as sentiment remains sour, but the markets are off the lows after President Trump called for a private meeting with China's Xi Jinping in relation to Hong Kong. All is not well in the Far East as unrest in Hong Kong is hanging over the financial hub, and the latest retail sales, fixed asset investment and industrial production reports from China all added to the view that the economy is cooling.

The slew of negative news has seen a huge shake down in global equity markets, and money has poured into government bonds. Both the UK and the US government bonds markets saw inversions in the respective 2 year and 10 years yields. The inversion of the yield curve is often viewed as a warning that a recession is in the pipeline, and when you add the German GDP report into the mix, you can see why equities slumped and bond yields dropped.

Oil was battered too as traders feared a slowdown in the world economy would bring about a fall in demand for the energy. Germany is a major manufacturing nation and the country might be slipping into a recession, and latest economic reports from China also points to a slowdown, and that feeds into the narrative about weaker future demand for oil. High grade copper is also used in the manufacturing sector, and that incurred large losses too.

Gold pushed higher yesterday as traders risk-off strategy helped lift the metal. In recent months there has been a strong inverse relationship between gold and the US dollar, and gold rallied despite the firmer greenback, which underlines the positive move.        

The pound made headway against the euro yesterday on the back of the solid UK inflation data. The CPI rate edged up to 2.1%, from 2%, while economists were expecting a fall to 1.9%. The core rate edged up to 1.9% - its highest reading since January. Demand is clearly rising, but the acid test will be the retail sales update. At 9.30am (UK time), the UK will announce the July retail sales figures and on a monthly basis, the reading is tipped to be -0.2%, which would be a sharp decline from 1% in June. The report which strips out fuel is also tipped to be -0.2%.

The US jobless claims report will be posted at 1.30pm (UK time), and the consensus estimate is 214,000. US retail sales will be posted at 1.30pm (UK time) too, and traders are expecting 0.3%, and the excluding autos report is tipped to be 0.4%. The Philly Fed business index will be revealed at the same time, and economists are expecting a reading of 10, which would be a sizeable fall from the July reading of 21.8. The retail sales report will be closely watched as they should provide a good gauge of demand in the US. Keep in mind, the jobless rate is low, earnings are solid and inflation has ticked up, so the economic backdrop is rosy despite the negative headlines.  

EUR/USD – remains in the wider down trend of 2019, and if the bearish moves continues it might target the 1.1000 area. A rally might encounter resistance at the 1.1300 region – the 200-day moving average.

GBP/USD – has been driving lower since mid-March, and if the bearish move continues it might target the 1.2000 region. The 1.2200 area might act as resistance.

EUR/GBP – has rallied for over two months, and if it holds above 0.9200, it might bring 0.9410 into play. A move to the downside might put 0.9089 on the radar.

USD/JPY – has been in a down trend since late April and if the bearish move continues it might target the 104.63 region. Yesterday’s move might have been a key day reversal, and should it push higher, resistance might be found at the 50-day moving average at 107.82.




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