Friday saw a disappointing end to the week for markets in Europe, however it didn’t stop them from recording their sixth successive monthly gain, with new record highs for the DAX and Stoxx600, however the gains over the last two months have been incremental at best.
We also saw new record highs for the FTSE250 last week, while the FTSE100 finished July at more or less the same level it ended at the end of May.
US markets also slipped back on Friday, although they still managed to finish higher for the sixth month in a row.
While the numbers don’t lie when it comes to the gains seen over the last few months, the last two months have also seen significant volatility and price choppiness.
This has been reflected in some sharp moves to the downside as well as the upside, but they’ve lacked any sort of conviction, one way or the other. The main concern for markets now appears to be about whether the second half of the year will be able to match up to some of the decent numbers we’ve seen from the various company updates over the past two weeks.
Rising cases of the Delta variant across Asia, along with a regulatory crackdown in China has seen the optimism of a couple of months ago give way to caution as to whether the gains seen so far this year can be sustained, as well as built upon as we head towards the autumn, when the risk of rising Delta cases causing more localised restrictions is likely to increase.
Last week Asia markets saw big declines due to a regulatory crackdown in China, with the Nikkei more or less trading near to its lows this year and the Hang Seng trading at a nine month low. The extent of the falls appeared to prompt a partial backtrack, or softening of tone by the Chinese authorities prompting a little bit of a rebound which appears to have continued today in Asia.
This looks set to translate into a positive open for European markets as we look ahead to a big week of economic data.
Only a few weeks ago the talk was of whether central banks would feel confident enough to start scaling back some of the stimulus measures that have been in place since the start of the pandemic, as the global economy recovers. This narrative appears to have shifted a touch to whether the economic rebound that we’ve seen so far this year may already starting to plateau, and begin to slow down.
This is particularly a concern for Europe where the ECB has already indicated that it is likely to remain accommodative way well into the middle of the decade, over concerns about the recovery in Europe.
Today’s manufacturing PMIs for July is expected to reflect this concern, although German manufacturing PMI expected to rise to 65.6, although this could get revised lower given the recent flooding. Elsewhere in Europe, France manufacturing PMI is expected to slow to 58.1, while both Italy and Spain manufacturing PMI are expected do the same from the levels in June to 61.5 and 59.5.
In the UK we’re also expecting to see a similar slowdown from the levels in June, to 60.4, from 63.9, largely due to disruptions caused by staff shortages, and interruptions to supply chains due to a rise in infections and workers self-isolating. Input costs are also rising, raising some concern that price rises could become more persistent and act as a brake on consumer confidence.
In the US the Federal Reserve is balancing a tightrope between maintaining a cautiously optimistic outlook on the US economy against a labour market which while improving is showing little sign of recovering the levels of labour participation that we saw pre-pandemic.
This week’s payrolls report will be of particular importance given that some on the FOMC appear to be more concerned about flatlining weekly jobless claims of around 400k, than they are about rising prices.
EURUSD – hit a one-month high last week at 1.1908, and as long as we hold above support at 1.1850, we should see a move towards 1.1975. A fall below 1.1840 could see a move towards 1.1750.
GBPUSD – ran out of steam just shy of the 1.4000 area last week. This failure to crack 1.4000 could prompt a bit of a pullback towards the 1.3820 area. A fall below 1.3800 could see a return to the 1.3720 area. A move through the 1.4020 area reopens a move back to the May highs at 1.4240.
EURGBP – has rebounded from the 0.8500 area, making the euro susceptible to another short squeeze towards 0.8580. A break below 0.8500 targets a potential move towards the 0.8480 area, and lower towards 0.8280.
USDJPY – found support at 109.30 last week. A break below 109.00 opens up the 108.20 area. We now have resistance at the 109.80 level, and behind that at 110.20.