05:45BST Friday 12th August 2016
This week’s break higher by the German DAX through the 10,500 level, along with new all-time highs for all three of the US main benchmarks does appear to have given European equity markets the extra impetus to kick on further yesterday.
The move higher in the DAX while welcome, does appear to be an outlier, in terms of the rest of the core Eurozone markets, and despite outperforming the rest of Europe it still hasn’t been able to wipe out all of its losses year to date.
As for the UK, continued weakness in the pound, which is now at 5 year lows on its trade weighted index, has driven the FTSE100 and FTSE250 to their highest levels in 14 months.
A sharp turnaround in oil prices also helped sentiment, after the Saudi Arabian oil minister said that oil producing countries would look at discussing prices when they meet in Algiers at the end of next month. This sort of jawboning has been a familiar tactic over the last few months by OPEC and non OPEC members as they attempt to put a floor under prices near $40 a barrel. While it can be effective in the short term, the eventual actions have rarely matched the narrative.
As we come to the end of another positive week for equity markets, the lack of any negative drivers while bond yields continue to make new record lows, does beg the question as to whether markets might be in the eye of an upcoming storm.
With central banks doubling down on easing bets, investors appear to be betting strongly that we could well see further gains given the ability of markets to absorb any number of setbacks, from concerns about China, Brexit, a slowdown in European GDP in Q2 against a backdrop of concern about the solvency of European banks.
At the beginning of this year investors’ concern about a slowdown in China prompted a sharp slide in global markets. With the yuan now settled at similar levels that prompted the first bout of market volatility this year markets appear much more sanguine despite the fact that the slowdown in China appears to be getting worse as we head into Q3.
Industrial production has been weak for some time and it was no surprise when the July figures showed a rise of 6% down from 6.2% in June. This has been less of a concern as Chinese authorities hope was that domestic consumption would take up the slack, however this doesn’t appear to be happening with retail sales continuing to fall short of expectations.
The weakness of imports data has been pointing to this weakness for a while and July’s retail sales would appear to confirm a slowdown in consumer spending with a rise of 10.2%, down from 10.6% in June.
More worryingly fixed asset investment came in weaker than expected coming in at 8.1%, down from 9% in June and well below expectations, largely as a result of a slowdown in spending by SOE’s.
The weakness of this data is likely to prompt speculation that once again Chinese authorities will ease monetary policy once again in the coming weeks and months to help prop up the economy.
We are also expected to get confirmation of this Q2 slowdown in Europe with the latest German, Italian and EU GDP numbers.
German GDP is expected to slow from 0.7% to 0.2%, while Italian GDP is also expected to post 0.2% growth, down slightly from 0.3% in Q1. The broader EU GDP number is expected to come in unchanged at 0.3%.
With the pound continuing to come under pressure today’s construction output numbers for June aren’t likely to rip up any trees or assuage concerns about a slowdown in the construction sector at the end of Q2. Having seen a decline of 2.1% in May, the June numbers aren’t expected to be that much better with a decline of 1.9% expected.
It’s been a difficult trading environment for US retailers in recent years as they struggle to remain relevant in a world where Amazon is ubiquitous. US retail sales over the past year or so have painted a rather mixed insight into the soul of the US consumer, though they did pick up in Q2, posting gains of 1.2% in April and 0.6% in June.
This sort of numbers have been the exception in the last twelve months, and today is likely to revert to the norm with a 0.3% rise expected for July.
EURUSD – continues to range trade above the 1.1040 level but has run into resistance around the 1.1200 area. We remain stuck in the same broad 1.0950/1.1250 range. We need a move beyond 1.1250 to open up a retest of the June highs at 1.1400.
GBPUSD – another disappointing day saw the pound slide back further towards its previous lows at 1.2800. A revisit of these lows continues to remain a risk. We need to see a recovery back through the 1.3060 area to stabilise and signal a move back towards 1.3200.
EURGBP – pushed up through to the 0.8625 area before slipping back, which suggests we could see a move towards 0.8705, 61.8% retracement of the 0.9805/0.6935 down move. Support now comes in at the 0.8490 area, with a fall below here arguing for a move back towards 0.8420.
USDJPY – having failed at the 102.70 earlier this week we could slip back towards the recent support at 100.60. As long as we stay above here then we could break higher towards 103.50. The risk remains for a move back towards the lows at 98.90 on a break below the July lows at 99.99.
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