Having finished the end of last week lower after a strong US payrolls report, European markets managed to start the week strongly, after a better-than-expected performance in Chinese exports for July which prompted optimism over a pickup in global economic activity.
This reasoning always felt a little tenuous given the weakness in the corresponding import data, which suggested weak domestic demand. Nonetheless, US markets took their cues from the same early optimism from European markets, as the S&P 500 hit a three-month high. This optimism quickly evaporated after US chipmaker Nvidia issued a profits warning in respect of its Q2 numbers which are due on 24 August.
This acted as a drag on the tech sector and ultimately resulted in the Nasdaq and S&P 500 pulling back from their intraday highs and finishing slightly lower.
The main focus this week is very much on tomorrow’s US CPI report in the wake of Friday’s bumper payrolls report, which saw US 10-year yields push up to their highest levels in two weeks. Yesterday saw a much bigger softening in 10-year yields, while 2-year yields remained above 3.2%, as bond markets continued to price the biggest inversion since the dotcom bust of twenty-two years ago.
Friday’s bumper jobs report has raised expectations that the Federal Reserve still has some way to go when it comes to raising rates, with 75bps currently priced in for September, while at the same time declining inflation expectations are indicating that the Fed might have room to look at raising rates in smaller increments.
Consensus opinion appears to be leaning towards the current strength in equity markets, being a bear market rally with limited upside, while on the other side there are those who think we’ve managed to carve out a base.
While it’s tempting to buy into the narrative that we’ve seen the lows of the year, none of the price action thus far serves to support that conclusion. Equity markets on both sides of the Atlantic are still very much in the downtrend from their January peaks, and Nvidia’s profit warning merely serves to underline the challenges facing, not only the tech sector, but the wider global economy.
That’s not to say we aren’t seeing companies beat expectations, we are, but it’s generally in areas where companies are able to pass on some price increases or are benefitting from seasonal trends. The numbers from Carlsberg yesterday are a case in point, after the Danish brewer raised its guidance due to higher sales over the last few months, as surprisingly due to the hot weather people drank more beer and were prepared to pay higher prices.
Today’s European session looks set to see markets open slightly lower after a weak US finish.
EUR/USD – another dull session yesterday – toppy anywhere near the 1.0280 area. While below the bigger resistance at 1.0350, the risk remains for a move back towards parity, and the previous lows at 0.9950. A move below 0.9950, towards 0.9660.
GBP/USD – a quiet session yesterday, but while above the 1.1980 area, the risk is for a squeeze higher in what could be an inverted H&S formation, with a neckline just below 1.2300.
EUR/GBP – struggling to overcome the 200-day SMA for now. We still have resistance at the 0.8480 area. While below the 0.8480 area momentum remains negative for a move towards the 0.8300 area.
USD/JPY – rallied through the 134.80 area and 50-day SMA opening the prospect of a move towards 136.30, and then 137.50. Dipped to the 134.35 area yesterday before rebounding. A slide below 134.20 could see an unwind of long positions.