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Europe set for weak open, as markets fixate on US CPI

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European markets got off to a weak start to the new trading week yesterday, on fears over an extended economic slump in China which caused a slide in copper and oil prices yesterday, as local Chinese authorities reimposed restrictions in response to rising Covid cases.

We saw seven-day restrictions announced for Macau, while reports of rising infections in Shanghai prompted fears that growth prospects for Q3 are unlikely to be V-shaped in nature, with this week’s China Q2 GDP numbers also expected to be ugly.

Concerns over a planned 10-day shutdown to Nord Stream 1, which started yesterday, raised concerns that it might not reopen on time, or be used as an excuse for Russia to further weaponise gas flows as we head towards the winter months.  

US markets also had a negative session with the Nasdaq 100 seeing the heaviest declines, with the main focus on tomorrow’s US CPI numbers for June, as investors wrestle with an inflation versus recession narrative. All the while the US dollar moved to its highest levels since late 2002, as traders used the greenback as a haven, pushing the euro ever closer to parity.  

US bond yields fell back, reversing a lot of their Friday gains ahead, with the US 10-year yield falling back below 3%, in a move that gives a fair indication of the skittish nature of current sentiment.

As we look at today's European open it's set to be a negative start, after Asia markets followed the weakness from yesterday, with the only data of note set to be the German ZEW survey for July which is expected to show a sharp deterioration after a modest improvement in June. The continued rise in energy costs, along with little sign that we will see a pickup in some of its key export markets, is expected to see the expectations survey slide to -40.5, from -28, while the current situation is forecast to fall to -34.5 from -27.6.

The pound also came under pressure yesterday sliding to its lowest levels against the US dollar since March 2020, although it is holding its own against the euro. Rising concerns that the UK economy has slowed sharply in Q2 have been weighing on the pound along with uncertainty about how committed the Bank of England is in getting on top of current levels of inflation is acting as a drag. Yesterday’s comments from Bank of England governor Andrew Bailey highlight the extent of this distrust, after he said he expected inflation to fall back sharply in 2023. Given that the Bank of England’s recent predictions around inflation have been about as useful as a chocolate teapot, that's quite a claim, given that the MPC thinks it will be 2% higher at 11% by the autumn.

Overnight the latest BRC retail sales for June came in at -1.3%, following on from a -1.5% decline in May, as higher inflation leads to consumers eschewing discretionary spending and focusing on the essentials of utility and energy costs. This morning’s decline in sales is the fifth successive month of declines in the particular measure, as the cost-of-living squeeze continues to bite. As a leading indicator for next week's retail sales numbers for June, it doesn’t paint an encouraging picture.     

EUR/USD – another multiyear low for the euro as it closes in on parity, with the potential for a move towards 0.9660. We need to see a move back above 1.0340/50 to stabilise and delay the prospect of further weakness.

GBP/USD – a marginal new low yesterday has seen the pound continue to drift lower with the 1.1500 area the next key support level. We need to see a move back above the 1.2040/50 area and the 50-day SMA to stabilise and target the 1.2120 area.

EUR/GBP – holding above the 100- and 200-day SMA at 0.8440/50 after posting its biggest weekly fall this year last week. Given the sharp nature of the fall we could see further weakness towards 0.8380. Resistance comes in at the 0.8520/30 area.  

USD/JPY – has moved through the 137.00 area and looks on course for a move towards the 140.00 level. Currently has solid support at the 134.80 area.  

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