There was a distinct lack of direction for European markets yesterday, with a weaker US dollar helping to act as a modest support for stocks more broadly, with the exception of the DAX which fell back on reports that Gazprom had reduced gas flows through Nord Stream 1 due to a turbine problem.
This move by Gazprom prompted European gas prices to spike higher and shifting the focus back to yesterday’s German IFO business survey for July which slipped to a two-year low, with the head of the Institute saying that the German economy is on the cusp of recession.
US markets also experienced an underwhelming session, having hit six-week highs last week there appears to be a reluctance to push things too much higher, as we gear up for a big week of earnings, with the Nasdaq taking the brunt of the declines yesterday, as today’s Fed meeting gets underway.
This weak finish looks set to translate into a lower open for European markets.
There is a concern that the strength of the US dollar over the last three months could prompt some unwelcome surprises in this week’s numbers from the various tech giants, with some concern that the US dollar’s strength could prompt some guidance downgrades. We’ve already seen Microsoft announce a revenue downgrade already earlier this month for the current quarter, while Walmart issued a profits warning last night after cutting margin forecasts due to higher inflation prompted lower spending on non-food and energy products. Could we see more, starting with Google/Alphabet later today?
Apple this week took the surprising step to offer discounts on its top of the range iPhone Pro 13 in China at the end of this month, for four days only in a move that suggests that Chinese demand may have cratered in the last three months. With Apple’s pedigree and previous reluctance to offer discounts, could this be an early sign of trouble ahead?
The other focus this week is the latest Federal Reserve rate meeting where another 75bps rate hike is due to be announced tomorrow, with the likelihood of a 100bps move receding sharply in the last few days.
Recent economic data appears to suggest that the US economy is slowing in a way that the Federal Reserve is likely to welcome, but they will be wary of pushing too hard.
Today’s US consumer confidence numbers are expected to reinforce that lack of certainty, with another decline from 98.7 in June to 97.2 and a 16 month low. The decline in consumer confidence has been one of the more contrarian indicators when it comes to how resilient the US consumer has been this year.
Despite seeing a gradual deterioration in confidence since the end of last year, US retail sales have been positive every month, with the exception of May, which only saw a modest decline.
With the US labour market also showing remarkable resilience its perhaps not surprising that investors are so uncertain about the state of the US economy, and ergo whether we are set to see a significant slowdown in economic activity.
EUR/USD – while below the peaks last week at the 1.0275 area the bias remains for a move lower, back towards parity. The main resistance still remains up at the 1.0340/50 area. A move below 0.9950, towards 0.9660.
GBP/USD – continues to edge higher as we look to move towards the 50-day SMA, and down trend from the February highs. Support remains at the 1.1870 area, with the bias remaining towards the downside while below the 50-day SMA.
EUR/GBP – the bias remains lower due to the failure to close above the 50-day SMA last week and the failed attempt above 0.8550. While below 0.8600 the bias remains for a drift back towards the recent lows at 0.8400.
USD/JPY – the fall from the 139.40 level last week found support at the 135.50 area last week. A break of 140.00 targets the 145.00 area. Major support sits at 134.80 level and the July lows.