We’ve all heard the analogy “picking up pennies in front of a steamroller” but in the case of trying to pick a top in US equity markets it’s a particularly apt one, as for the ninth day in a row the Dow made yet another record close, while the Nasdaq and S&P500 also closed higher as the positive afterglow of Friday’s jobs report continued to buoy sentiment, with volatility on the S&P500 at its lowest level in decades, as the summer doldrums beds in even further.
It was a slightly more mixed day for markets in Europe with the DAX picking up the wooden spoon, while the FTSE100 managed to close at a six week high, helped by a strong performance from the basic resource sector which was driven by strong gains in iron ore, copper and steel rebar prices. This rebound has been helped by a surge in Chinese steel prices as low inventories have started to get replenished, which in turn has helped iron ore continue its recent recovery after its sharp drop towards the end of Q1.
Some of the more recent data out of China has pointed to a significant rebound in both external and internal demand with improvements in both imports and exports in the last three months. Exports in particular have shown a continued improvement in the last three months reflecting improved demand in both the EU and Japan, while imports have remained steady after a weak start to Q2 on the back of a sharp dive in commodity prices at the end of Q1.
This morning’s Chinese trade data for July has got Q3 off to a slow start with imports only rising 11% a sharp fall from June’s 17.2%, which raises some concerns that domestic demand may be softening. Exports were also a bit of a worry as they only rose 7.2%, below expectations of 11% and a fall from June’s 11.3%. This would appear to suggest that while global demand is still positive it may well not be as strong as initially thought, which might be a concern further down the line if it suggests a start of a trend.
It’s also likely to be an important week for the US dollar, in light of the recent sharp declines of the last few weeks. Friday’s payrolls inspired rebound came to a bit of a halt yesterday, though all in all it didn’t really go anywhere, treading water for most of the day.
Inflation is likely to be a key theme this week with two Fed speakers yesterday in the shape of the St. Louis Fed’s James Bullard and the Minneapolis Fed’s Neel Kashkari, with both of them being less than effusive about the prospect for a further tightening of US interest rate policy.
Later this week we’ll get to hear from the New York Fed President William Dudley on Thursday this week and his thoughts ahead of what is likely to be some important CPI numbers on Friday. Dudley has been one of the more hawkish members of the FOMC in recent months so if he continues along those lines the US dollar could well get a lift.
The pound has been under pressure in recent days at nine month lows against the euro after last week’s dovish Bank of England inflation report.
Yesterday we saw credit card spending data from Visa show that the UK consumer has continued to rein back spending though it was notable that spending on hotels, restaurants and bars which would appear to show that this particular sector could well be getting a staycation lift.
The latest retail sales numbers for July from the British Retail Consortium would also appear to support that with a rise of 0.9%, following on from the 1.2% gain seen in June. This rise it appears was driven by rising costs of food, with purchases of non-essential items falling back. While it would be easy to suggest that the decline in non-essential items is a sign that consumers are cutting back, it could also be suggested that higher food sales is down to increased spending on food for barbecues and the like.
EURUSD – currently struggling to get back above the 1.1830 area, after last week’s inability to close below the 200 week MA at 1.1795. An inability to do this throws into doubt the imminent prospect of a move towards 1.2000. While below 1.1830 we could slip back towards the 1.1610 level.
GBPUSD – could well see further falls here after the key day reversal last week. The pound still has support just above the 1.3000 level, with only a drop below 1.3000 opening up a retest of the 1.2900 level.
EURGBP – holding below the 0.9050/60 level for now, but we need to hold above the 0.8980 area to challenge the 0.9300 highs of last year. Support at the 0.8980 area needs to hold to prevent a pull back to the 0.8870 area.
USDJPY – having found support at the 109.80 area, we need to see a move back towards the 111.30 area to stabilise and shift the onus away from a test of 108.20, and towards a return to the 112.30 area.
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