European markets got August off to a decent start yesterday, with the Stoxx600 and FTSE250 hitting new record highs, on the back of M&A activity and some positive company updates.
The same could not be said for US markets, which after an initially positive start rolled over after European markets closed, on concerns about weakening growth prospects over the rest of the year.
A sharp decline in US treasury yields along with similarly sharp declines in the oil price appears to have prompted some profit taking, after the latest ISM manufacturing report for July unexpectedly slipped to a six-month low, although on a more positive note the employment component showed a decent rise from June.
With a number of US states reinstating mask mandates and tightening restrictions, the optimism of a few weeks ago is now being replaced by doubts as to how resilient the recovery we’ve seen so far this year can remain, as we head into the autumn and the weather starts to get colder.
Yesterday’s manufacturing PMIs, while decent for Europe, also showed signs of slowing, reinforcing the doubts about the recovery being sustained over the rest of the year.
It was a similar theme last week with a Jekyll and Hyde market, optimistic one day, and pessimistic the next, and it looks like August could be building up to play out in a similar fashion to July.
While the slide in bond yields spoke to concerns about slowing growth, gold prices edged a little bit higher, as markets in Asia came under pressure back this morning after their decent start to the week yesterday. The weakness in Asia wasn’t helped by comments from an official Chinese News agency that labelled online games as “spiritual opium” igniting fears of a possible clampdown on online games companies.
The Reserve Bank of Australia, who until a few weeks ago had been expecting to reduce its bond buying from A$5bn to A$4bn a week from September, decided to keep that option on the table this morning, confounding expectations that they might hold off due to the recent lockdowns and increase in virus cases across Australia.
This was a surprise given the change in economic circumstances we’ve seen in the past few weeks, with Delta cases rising across the country and restrictions being re-imposed in various regions.
The optimism of a few weeks ago has quickly been replaced by pessimism over how the economy will be able to perform as cases start to rise, while the Australian government tries to play catch up on its vaccine program. The RBA did keep their options open in the event economic conditions were to deteriorate further, but for now the central bank is adopting a “wait and see” approach on the economy. Unsurprisingly the Australian dollar shot higher, as traders sought to readjust.
Last night’s decline in US markets and softer Asia session looks set to translate into a fairly flat open later this morning for markets in Europe.
EURUSD – finding support at the 1.1850 area for now. A fall below 1.1840 could see a move towards 1.1750. As long as we hold above support at 1.1850, we should see a move towards 1.1975.
GBPUSD – struggled to rebound yesterday and remains vulnerable to a drift back to the 1.3820 area, A fall below 1.3800 could see a return to the 1.3720 area. A move through the 1.4020 area reopens a move back to the May highs at 1.4240.
EURGBP – continued to squeeze higher yesterday with the risk of a move towards the 0.8580 area. Support remains down near the 0.8500 level. A break below 0.8500 targets a potential move towards the 0.8480 area, and lower towards 0.8280.
USDJPY – with resistance up at 109.80 the risk is increasing for a move towards 109.00, with a break below targeting the 108.20 area.