European stock markets are in the red as heightened trade tensions between the US and China weigh on investor sentiment.

Europe

Traders are fearful that a trade spat between the two largest economies in the world could hamper global growth.

The Bank of England (BoE) hiked interest rates, and the pound initially jumped, but the rally didn’t last long. The relative weakness in the pound couldn’t prop up the FTSE 100.

In London, mining companies like Rio Tinto, BHP Billiton and Anglo American have lost ground as investors are worried that China’s demand for minerals will wane.

Barclays posted a 188% rise in second-quarter profits to £1.9 billion, which comfortably topped the consensus estimate of £1.46 billion. The bank confirmed that operating costs fell by 2.6%. The investment banking arm was boosted by a 32% jump in equity trading revenue. The bank has a strong liquidity position as the core capital ratio increased to 13%, and traders were expecting 12.9%. Barclays paid an interim dividend of 2.5p, and declared it is on track to pay a full-year dividend of 6.5p.   

Rolls Royce confirmed that both underlying profit and cash flow will be at the upper end of the guidance. The aerospace and power systems division performed well. The group will take a hit of £554 million regarding the Trent 1000 engine problems, but there is progress being made on the restructuring programme.

Serco delivered impressive first-half results as the underlying trading profit jumped by 20% to £37.6 billion, meeting the company’s forecast. The firm introduced streamlining in 2014, and hopes to see the benefits of it in the coming years. 80% of new orders were from overseas contracts, and the CEO, Rupert Soames, announced that there are ‘significant opportunities’ abroad.     

US

The Dow Jones and the S&P 500 are in the red as trade tensions remain high. US indices are holding up better than those in Europe or Asia, partially because the US economy is more robust.  

The initial jobless claims level rose to 218,000 from 217,000, while the consensus estimate was for 220,000. The jobless claims report has ticked up recently but it is still very near multi-decade lows. Keep in mind, the ADP employment report yesterday jumped to 219,000, which easily exceeded the 185,000 that economists were expecting. The non-farm payrolls report will be released tomorrow, and traders will be anticipating a good set of figures given the jobless claims and ADP updates.

The Federal Reserve kept interest rates on hold, meeting expectations. The US central bank remained optimistic on the economy and hinted at further monetary tightening. Traders are speculating that the Fed will hike interest rates in September and December, and tomorrow’s employment report could shape dealers’ views.

FX

GBP/USD had a roller coaster ride today. It started out lower on the session on account of the stronger US dollar, and then rallied after the BoE hiked interest rates. All nine members of the UK central bank voted in favour of hiking interest rates. The rally didn’t last long as traders got the sense that this was a one-off hike, rather than the beginning of a prolonged tightening policy. Despite today’s volatility, the BoE have sent out a clear message that the cost of borrowing will go up, and consumers should be wary of becoming overly indebted.

EUR/USD is under pressure due to the rally in the US dollar. Eurozone producer price index (PPI) jumped to 3.6% in June, from 3% in May, and economists were expecting 3.5%. The jump in PPI suggests that demand is strong, and this could lead to higher inflation down the line.   

Commodities

Gold is lower on the day, and the metal dropped to a level not seen since mid-July. The firmer US dollar and the prospect of two more rate hikes from the Fed is hurting the metal. Gold has been in a downward trend since April and we haven’t seen any signs of the bearish move coming to an end. Despite the drop in global equity markets, gold still can’t attract buyers, and this underlines how bearish the recent move has been.

WTI and Brent crude oil are lower today as higher US oil stockpiles and raised production from Russia and Saudi Arabia have put pressure on the oil market. Yesterday the Energy Information Administration report showed an unexpected surge in US oil inventories. Oil production in Saudi Arabia last month jumped to near-record levels, and this is hurting the oil market.  

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