European markets had a disappointing start to the week, slipping back sharply against a backdrop of geopolitical concerns as the US and South Korea began military drills, while sliding yields clobbered financial sector stocks.
One bright spot was the performance of the mining sector which found itself underpinned by surging metals prices, with zinc, nickel, copper, and iron ore prices all pushing to multiyear or multi month highs.
While some of the recent strength can be explained by the weakness of the US dollar, the growth story along with slowing demand out of China as shown by recent data doesn’t appear to square with the price rises we’re currently seeing.
Overall forecasts for global GDP growth along with the recent IMF warning about the size of China’s debt point to markets overestimating the ability of China to sustain the level of demand that seems to be being priced in, even allowing for the fact that China is shutting down excess production capacity.
While markets in Europe struggled, US markets were more mixed with the Nasdaq slipping back while the Dow and S&P500 posted some modest gains, and this looks as if it will translate into a more positive start for European stocks today after yesterday’s disappointing start. The weakness of the US dollar may well be helping limit the downside for now, but the political environment in Washington DC is still keeping markets on their toes.
Attention for this week will remain on Jackson Hole as well as the lead up with investors likely to be hanging on every word of ECB President Mario Draghi, when he steps up to the podium. Any indication that the ECB is heading towards an imminent discussion of a tapering program could well introduce more paid for European stocks which have been moving in the opposite direction to the euro since it broke above 1.1300 in June this year.
On the data front the latest German ZEW economic sentiment indicator is expected to continue its decline from its May peaks of 20.6 with a decline from July’s 17.5 to 14.8.
The euro has also been edging higher against the pound heading back to its November 2016 peaks as markets write off the prospect that the Bank of England will look at a tightening of policy ahead of the ECB.
Today’s borrowing numbers for July are expected to show a modest increase of £0.2bn, a significant improvement on June’s £6.9bn, helped by improved tax receipts.
We’ll also get a look at the latest CBI industrial orders data after an extremely positive number in July boosted confidence in the manufacturing sector, and showed output growing at its fastest rate since the mid 1990’s. August is expected to show a slight slowdown to 8 from 10 in July, but nonetheless is expected to largely sustain the positive trend seen a month ago.
EURUSD – the euro pushed through the trend line at 1.1790 and could well head higher from here towards the 1.1850 area, towards the 1.2000 area. The main support remains back down near the 1.1680 area for now.
GBPUSD – continues to find it difficult to move beyond the 1.2940 area running the risk of a move down towards the 1.2810 area and even the 200 day MA at 1.2600. We need to move above the 1.2940 area to retarget the 1.3040 level.
EURGBP – no sign of a pullback thus far as we continue to edge higher as it looks to head towards the November 2016 peaks at 0.9300. Support remains down near the 0.9040 area and below that at the 0.8980 area.
USDJPY – downside pressure continues to dominate with the April lows at 108.13 the next key support. We need to push back through the 111.30 area to stabilise.
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