European stocks look set for a lower open on Tuesday, with some of the post-Brexit gains starting to fade away in the face of geopolitical uncertainty.
Geopolitical shocks have played their part in holding down European markets over the past two trading days with investors concerned by events in Nice and Turkey. Late last night an Afghan refugee was reportedly killed by police in Germany for attacking train passengers with a knife and axe, in what appears to be another terrorist-motivated lone wolf attack.
UK stocks were insulated by concerns in Turkey, closing higher thanks to a boost to the technology sector after ARM Holdings agreed to be sold to Japan’s Softbank. The fall in the pound after the EU referendum has given UK-listed companies a distinct M&A premium. With the rise sudden pickup in deal activity, investors will be scouring areas of the UK stock market for the next potential target.
The US stock market has continued its good form with the Dow Jones Industrial Average making a new record high and tallying its seventh daily gain on the trot. Bank of America’s smaller than expected 18% drop in profits proved enough to galvanise a belief that second quarter earnings season is progressing well. Overnight Intel beat expectations but no update on a sale at Yahoo and weaker subscriber numbers from Netflix could weigh on markets on Tuesday.
It’s a big week for economic data from the UK. First up on Tuesday is inflation. Annual CPI growth is expected to rise to 0.4% from 0.3% previously thanks to a more moderate fall in energy prices. Higher inflation would complicate the Bank of England’s decision on whether to cut interest rates in August. The BOE’s Martin Weale said on Monday that he not yet decided on whether to vote for rate cut and appears willing to delay action if economic data holds up.
Anecdotally, news that Wells Fargo just bought an 11 storey office block in the City of London goes counter to a fear that banks would flee London after Brexit, lowering the contribution of financial services to UK growth.
EURUSD – The euro rose modestly on Monday but remains below 1.11 and is still in the middle of a 200-pip range between 1.10 and 1.12. The large downswing on June 24 through the bottom of its old trading range implies further downside towards 1.08.
GBPUSD – Sterling consolidated with an inside day pattern above 1.32 on Monday. Gains have been capped by a Tweezer Top-like rejection from just below 1.35. Another test closer to the lows may be needed to establish a bottom.
EURGBP – Euro-Sterling has formed a small spinning top after a second strong bounce from 0.825. A break lower could target the old swing high at 0.8117, though the uptrend favours another move higher to the high above 0.86.
USDJPY – Dollar-yen closed Monday right back at its resistance from the 50-day MA, which has acted as resistance throughout the downtrend that began in December. A pullback to the July 1 high at 103.40 could find support.
Equity market calls
FTSE100: to open 16 points lower at 6,679
DAX: to open 32 points lower at 10,031
CAC40: to open 15 points lower at 4,342