As we look ahead to a new week Europe’s markets look set to open slightly higher after Asia markets underwent a mixed session in the wake of the latest Japanese Q2 GDP numbers which came in at 0%, sharply down from the 0.5% seen in Q1, and below expectations of 0.2%.
Of greater concern was that business spending also slid 0.4% when it was expected to rise 0.2%, meaning that for all the additional measures announced by Prime Minister Abe as well as the Bank of Japan in the last quarter the economy continues to struggle. Following on from last week’s disappointing US and Chinese data and it would appear that the global economy slowed down quite markedly in the second quarter..
We saw record tumble last week on pretty much a daily basis for US markets as all three major US benchmarks hit record highs for the first time since 1999.
The resilience of equity markets needs to be set against a backdrop of ever falling and ever more negative yields, as central banks double down on their easing bets.
Disappointing Chinese data at the end of last week appears to suggest that we could well see additional measures by the PBoC in the coming weeks and months.
Even in Europe the strong start in Q1 wasn’t matched in Q2, though Germany still managed to perform slightly better than expected. The European economy such as it is still appears to be dominated by Germany, take the Germany out of the equation and the picture for Europe would look quite different, and not in a good way.
All thoughts of a US rate rise appear to have been put on the back burner until the end of the year after July retail sales missed expectations by some distance, while producer prices declined 0.3%, suggesting that inflationary pressures aren’t as excessive as previously speculated.
Speculation on the nature of the Federal Reserve’s next move is likely to invite further speculation later this week with the publication of the latest Fed minutes for the July meeting, later this week.
While some policymakers appear keen to keep the prospect of a US rate rise on the table for this year, the general tone of most US policymakers has been much less effusive about the probability of a move on rates in the past few weeks. There have been some exceptions with San Francisco Fed chief John Williams arguing that the prospect of two rate rises this year was still a possibility.
Despite this markets don’t appear to be too inclined to take his comments at face value, with even the prospect of a December move falling to 42%. This shouldn’t be too much of a surprise given that in May Mr Williams was suggesting that the prospect of at least 5 rate rises by the end of 2017 was a realistic probability.
The pound has had a torrid time of it over the last few days and weeks, and has remained under pressure, falling sharply for the second week in succession as Bank of England policymakers continue to talk of easing measures before the end of the year.
Andrew Haldane, the Bank of England’s chief economist became the latest policymaker to justify the banks recent intervention, saying that the decision to embark on further easing was an easy one as jobs and growth should come first, despite concerns about widening pensions deficits.
Against this negative backdrop, this week’s economic data will take on greater importance than normal, given it will give markets another snapshot of how the UK economy performed in the aftermath of the Brexit vote, with the latest data for inflation, retail sales and jobless claims data.
EURUSD – we saw another failure above the 1.1200 level last week which keeps the same broad 1.0950/1.1250 range intact for now. We need a move beyond 1.1250 to open up a retest of the June highs at 1.1400.
GBPUSD – the pound continues to decline with the previous lows at 1.2810 the main focus for now. A move below 1.2800 has the potential to target the 1.2600 area. We need to see a recovery back through the 1.3060 area to stabilise and signal a move back towards 1.3200.
EURGBP – continues to push higher towards 0.8705, 61.8% retracement of the 0.9805/0.6935 down move. Support now comes in at the 0.8490 area, with a fall below here arguing for a move back towards 0.8420.
USDJPY – continues to find support above the recent lows just above 100.60, having failed at the 102.70 earlier this week we could slip back towards the recent support at 100.60. As long as we stay above here then we could break higher towards 103.50. The risk remains for a move back towards the lows at 98.90 on a break below the July lows at 99.99.
Equity market calls
FTSE100 is expected to open 9 points higher at 6,925
DAX is expected to open 15 points higher at 10,728
CAC40 is expected to open 4 points higher at 4,504