Yesterday saw another positive day for European stocks, with the DAX, Stoxx600 and FTSE250 all setting new record highs. In contrast the FTSE100 performed its usual trick of being the perennial party pooper, by slipping lower as a number of big blue chips went ex-dividend.
The Dow and S&P500 likewise managed to also post new record highs, despite a hotter than expected US PPI report for July which hit a record high of 7.8%, a 0.6% rise on the previous month, while core prices jumped to 6.2%.
The sharp rise in July PPI appears to have caught the market slightly unawares after Wednesday’s data showed July CPI levelling out. This sharp divergence between PPI and CPI has served to muddy the waters ever so slightly when it comes to the transitory narrative, given that if not passed through, could see profit margins start to come under pressure. Unsurprisingly US 10-year yield edged back up towards the highs this week, however stock markets were more encouraged by another fall in weekly jobless claims to 375k.
For now, markets appear to be working on the baseline assumption that a taper is coming, and getting comfortable with that idea, and as long as the discussion doesn’t move onto the more sensitive topic of rate rises, then the current trend of higher highs looks set to continue.
Asia markets which have lagged behind to some extent this week, over concerns around rising infection rates and lagging vaccination rates across the region, as well as a more interventionist Chinese regulator look set to finish the week on a mixed note, while markets here in Europe look set to open slightly higher.
It looks set to be a quiet day on the data front, with the only items of note being July import and export prices, and the latest University of Michigan Consumer Sentiment survey for August, along with the latest consumer inflation expectations surveys.
The US dollar looks to be on course for its second successive positive week, with the prospect that further improvements on the data front, could well push it through this week’s four month high and onto levels last seen in November last year.
The pound on the other hand has had a disappointing week, despite confirmation the UK economy rebounded strongly in Q2, however there were pockets of weakness in the numbers, notably in construction output, as well as industrial production, which showed significant weakness. This lumpy recovery looks set to continue into Q3, however on a brighter note we did see strong gains in private consumption which jumped 7.3%, well above expectations.
EURUSD – finding support at the twin lows of 1.1704, but we need to recover through the 1.1770 area, seeing the potential for a move back to 1.1830. A move below 1.1700, opens up the prospect of a move towards the November lows at 1.1603.
GBPUSD – coming under further pressure with support at 1.3800 looking fragile, with the potential to sink towards 1.3780 and even 1.3720. We need to break above 1.3920, where we have trend line resistance from the June highs.
EURGBP – found support at 0.8450 this week but we need to see a move above 0.8510 to stabilise. While below 0.8510 we still have the potential to move lower towards the 2020 lows at 0.8280. The euro needs to recover back above the 0.8510 level to stabilise and squeeze back towards 0.8580.
USDJPY – finding support at the 110.20 area, but need to push above 110.80 to retarget the July peaks. A move below 110.00 retargets the 109.80 area. This remains a key support for a retest of the July peaks.