It’s been another mixed bag for equity markets overnight with the US breaking a four day losing streak while markets in Asia underwent a broadly negative session, despite a rebound in the Turkish lira, and some other emerging market currencies.

The weakness in Asia markets could well be down to ongoing disappointment over the weakness of yesterday’s Chinese data for July, while the strength of the US dollar doesn’t appear to be worrying US investors’ despite the US dollar index making new one year highs.  US markets appear to be in a goldilocks scenario, with a strong economy, decent yields and strong earnings. Whether that can last is another matter but for now they appear to be in a sweet spot.

Markets in Europe opened modestly higher this morning, however it is hard to escape the fact that further upside is likely to be hard to sustain, while escalations in Turkey, and slowing economic growth in Europe temper investor sentiment.

The lira has gained today after the Turkish bank regulator placed a limit on Turkish bank FX swap exposure to 25% of their equity. This has prompted some unwinding of US dollar long positions sending the exchange rate back below 6.

This morning’s escalation by Turkey in slapping huge tariffs on US goods from rice, to cars to alcohol is unlikely to be well received by the US administration as they attempt to secure the release of their citizen. President Trump’s reaction could well come by way of tweet later today.

Turkish President Erdogan appears to be playing a dangerous game if he thinks he can come out on top in this spat with the US. Notwithstanding the fact that tariffs are always inflationary they will only increase the concerns of Turkish business who want the central bank to start getting to grips with the runaway inflation in the Turkish economy. They will also increase the downward pressure on the lira, in turn causing greater pain to those Turkish corporates who have currency denominated loans.

The rise in the US dollar has exerted further downward pressure on the pound, pushing it to a new one year low, which in turn is likely to exert upward pressure on UK inflation, or at least stop it from coming down as quickly as it should. Since April the pound has lost over 10% of its value mitigating a lot of the deflationary effect of the rally that we saw from the 2017 lows.

We’ve already seen UK CPI inflation come down from peaks of 3.1% at the end of last year, but we could struggle to come much below the lows seen over the past few months at 2.4% if the pound continues to remain weak. A weaker pound puts upward pressure on input costs and the decline in sterling in the past few months is not good news for UK consumers, even if it does help exporters.

Today’s inflation numbers for July came in at 2.5%, a slight increase from June, but in line with expectations, while core prices rose by 1.9%, also as expected.

A slide in copper prices appears to be dragging on the FTSE100 this morning, dropping to one year lows, as the odds of a strike at the Escondida mine in Chile diminished after talks were extended for another day in order to reach an agreement, and avoid supply disruptions.

On the companies front the US Justice Department announced that Royal Bank of Scotland had agreed to pay $4.9bn to settle the allegations over the sale of mortgage backed securities between 2005 and 2008. The bank announced this morning that it would pay an interim dividend of 2p a share, a welcome payback for the UK government of about £150m given that it is the majority shareholder at 62%.

Nonetheless the amount is but a flea bite when set against the billions of pounds of losses over the last ten years.

It’s also not all doom and gloom in the UK construction sector as Balfour Beatty continued its resurrection story by announcing a rise in first half profits of 69% to £66m as its turnaround plan from its own near death experience in 2015, continued to bear fruit. 

The company increase its net cash from £161m to £366m as its focus on only high margin business contained to reap dividends. On that front the interim dividend was raised to 1.6p a share.

In the US we get to see the latest snapshot of the US consumer with July retail sales expected to slow slightly to 0.1%, down from 0.5% in June.

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