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Europe set for a slow start to the week

Europe set for a slow start

European stocks finished last week with more record highs for the FTSE 250 and the Stoxx 600, while the FTSE 100 posted its best weekly gain since June, as stock markets started August on the front foot.

US stocks also enjoyed another decent week, with more record highs for the Dow, S&P 500 and the Nasdaq, although Friday’s close saw the more highly-valued Nasdaq take a bit of a tumble after the latest US non-farm payrolls report crushed expectations.

There was very little to dislike from the numbers, with strong gains of 943,000 in July, as well as a decent upward revision to 938,000 for June, which sent the unemployment rate tumbling from 5.9% to 5.4%, while the underemployment rate also fell from 9.8% to 9.2%. A rise in the participation rate was also well received, although it was fairly modest, rising to 61.7%, still well short of the 63.4% pre-pandemic.

The strength of the numbers also saw US 10-year yields rebound strongly as some of the growth concerns that had begun to get priced into the US recovery story, started to get priced out. It still pays to be cautious however as Friday’s payrolls surge came before the recent surge in Delta cases which could still yet act as a summer break on hiring as we head towards September.

The payrolls report was also good news for the US dollar, which posted its biggest one-day gain since June, as expectations over the direction of US monetary policy shifted again. The big test this week will be whether the rebound in the US dollar and yields we saw last week is sustainable, or was merely a knee jerk response to the surprise of two successive jobs reports, that only just came up shy of the 1m mark. This week’s CPI and PPI inflation numbers are likely to be the next key test for the US dollar, and more critically for real yields, along with inflation expectations.

With Friday’s payrolls report reducing the number of Americans still out of work from before the pandemic closer to 5m, todays JOLTs job openings report for July is likely to be instructive in terms of whether the number of vacancies in the US economy fell back from the 9.2m we saw in June.  

While we’ve seen a degree of optimism return to the US labour market and the US economy, concerns are rising over the Chinese economy which has been showing some worrying signs of weakness in recent weeks, amidst reports of increasing outbreaks of Delta variant cases which are reportedly prompting lockdowns across various parts of the country.

The various outbreaks across Asia, which have been accelerating in recent weeks also appear to be starting to bleed into some of the recent economic data, with the latest July trade numbers at the weekend showing export growth of 19.3%, the lowest levels this year, and also below expectations. Imports were also weaker than expected, rising 28.1%, down from a 36.7% rise in June, as demand for iron ore, crude oil and steel slowed, while recent floods have also disrupted economic activity.  

On any other scale these numbers would be very good indeed, taking into account residual base effects from last year, as well various port disruptions due to labour shortages and Covid disruption, there is a concern that these numbers could well weaken further.

As we look ahead to a new week, Asia stocks have started the week on the front foot, as investors there play catch up on Friday’s payroll gains, however European stocks look set for a slightly softer beginning, ahead of the latest German trade numbers for June which are expected to show that imports slowed in June, to 0.4% from 3.3% in May.

EUR/USD – completed the decline to the 1.1750 area. This support needs to hold to signal a rebound back to the 1.1830 area. Below 1.1740 signals a return to the March lows at 1.1704, and the November lows at 1.1603.   

GBP/USD –slipped back to 1.3860 last week with the potential for a retest of the 1.3820 area. A fall below 1.3800 argues for a return to the 1.3720 area. A move through the 1.4020 area is needed to reopen the path higher.    

EUR/GBP – slid to an 18-month low last week at 0.8470 with the potential to move lower towards the 2020 lows at 0.8280. The euro needs to recover back above the 0.8540 level to stabilise.  

USD/JPY – looks on course to retest that 110.70 area and July highs, after last week’s break above the 109.80 area. This should now act as support for another leg higher.

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