Despite spending most of the day in positive territory US stocks rolled over in the last hour of trading, with the tech heavy Nasdaq leading the way, in the process pulling the S&P500 back from a retest of its previous record highs.
It wasn’t immediately apparent what the actual catalyst was for the sudden change in sentiment, but it soon became apparent that downbeat comments by Mitch McConnell, the Republican leader of the US Senate about the imminent prospect of an agreement on a stimulus deal, may well have played a part in the late sell-off.
For several days now markets have been working on the assumption that US politicians would reach a deal in some form, after President Trump’s executive orders at the end of last week. This now seems rather premature, and could actually be causing these same politicians to drag their heels in coming to an agreement. A rising stock market doesn’t exactly fuel a sense of urgency, and as such could be counter-productive. On the other hand, a market puke might actually concentrate minds and focus attention on the job in hand.
The late sell-off was all the more surprising given that precious metals also plunged with gold and silver dropping sharply, largely on the back of a rise in US treasury yields, with the US 10 year hitting its highest level in over a month.
It wasn’t immediately clear what caused this sudden rise in yields but it may have been the sharp jump in US core PPI prices for July which rose from -0.3% to 0.5%, in what could be a leading indicator for a pickup in inflationary pressures, as well as demand.
As a result of last night's late sell off in the US, markets here in Europe look set to open lower, with the main focus of attention on today’s preliminary UK Q2 GDP numbers. There has been an awful lot of pessimism surrounding these numbers, even more so in light of the horror show that was the numbers out of Europe a couple of weeks ago.
Here we saw eye watering drops in output in the latest Q2 GDP numbers, from the likes of Spain, where we saw a Q2 drop in output of -18.5% to Germany which saw a more modest -10.1% drop, while the US saw a -9% fall in output.
Today’s UK numbers are expected to be no less sobering, with estimates from anywhere between -15% to -25% for Q2, a big drop from the -2.2% contraction seen in Q1.
Whatever the numbers are, and they won’t be pretty, the more important question is how quickly the UK economy can bounce back, and we have seen some progress on that. Today’s numbers will cover the sharp fall seen in April, which the monthly numbers showed as a -20.4% fall, followed by a 1.8% gain in May.
This means we need to see a sharp acceleration in the June numbers, to pull the quarterly number back up into the mid-teens, given the UK’s heavier reliance on services, which could well act as a drag on the prospect of a V-shaped bounce back, due to the slow pace of the economic re-opening.
Expectations are for a -20.5% Q2 contraction, which seems a little on the pessimistic side, even when looked at over a three-month period, and assuming that April would have been the low point. Having said that we’ll be doing well if we come in anywhere in the mid-teens.
In any event, however bad this morning’s numbers are, from an output point of view the low point is in all probability behind us, which means that the important focus now is what lies ahead, and on that the outlook is slightly more positive, though not without its obstacles, as yesterday’s employment data visibly illustrated.
Later on, in the morning we’ll also get to see the latest June manufacturing and industrial production numbers. We did see strong rebounds in the May numbers of 8.4% and 6% respectively so the hope is that continued into June as well as those sectors also got back on their feet, after their April lockdowns. Expectations are for a rise of 10% and 9.2% respectively.
EURUSD – currently trading below the 1.1830 area, but needs to push down through the 1.1720 to complete a move towards the 1.1680 area. A fall through here has the potential to target the 1.1580 area.
GBPUSD – while below the 1.3200 area the pound is vulnerable to a break below the 1.3000 area, with support also at 1.2980. A break below 1.2980 opens up the prospect of a move towards the 1.2770 area. Resistance remains at last week's highs, just below 1.3200.
EURGBP – still finding support between the 0.8970/80 support area. While this holds the risk remains for a move rebound back to the 0.9080 area. Below the 0.8970/80 area opens the prospect of a move towards 0.8920.
USDJPY – starting to look better bid with the next resistance now up near the 107.20 area, though 106.80 may well find some selling interest as well. Support comes in at the 106.20 area with major support below that at 105.20.