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Europe set for lower open in big earnings week

Despite a marked deterioration in economic data at the end of last week, European stock markets saw a positive week, with the FTSE100 and the DAX both closing at a six-week high.

US markets also finished the week higher, however a disappointing set of numbers from social media minnow Snap, as well as a sharp drop in the July services PMI, saw stocks there finish the week on the back foot. This late slide looks set to translate into a slightly lower European open later this morning.

This late Friday weakness appears to have sharpened concerns that it might be a forewarning of similar disappointments as we look towards the likes of Google owner Alphabet, and Facebook owner Meta Platforms who report their numbers later this week, starting with Alphabet tomorrow.

There is also the not insignificant matter of the latest US central bank rate decision which is expected to see the Federal Reserve raise interest rates by another 75bps on Wednesday, following on from the 75bps in June.

One of the notable consequences of the recent deterioration in US economic data, as well as European economic data more broadly, has been that bond markets appear to be pricing in the possibility that this slowdown in the economic numbers might prompt central banks to slow down the pace of their commitment to raise interest rates, in the coming months.

We’ve seen a sharp fall in bond yields across the board, both short- and long-term rates have declined sharply. These falls have come about despite the European Central Bank raising their headline rate last week by 50bps in a move that was unexpected, given the consensus had been for a 25bps hike.

The slide in yields could also be symptomatic of another force at play, namely that bond markets are now pricing that the actions of central banks are prompting an element of demand destruction and ergo a recession in the coming months.

These concerns are also being reflected in commodity prices which in recent weeks have seen sharp falls across the board, from agricultural commodities to copper, as well as oil prices.

Despite these falls in commodity prices, headline inflation appears to be showing little signs of slowing, with US CPI hitting a 40 year high of 9.1%, UK CPI at similarly eye watering levels of 9.4% and EU flash CPI for July set to move closer to 9% in numbers released later this week.

In spite of these concerns about central banks being too aggressive there are plenty of reasons to think the Federal Reserve is likely to continue to go hard on driving inflation out of the system, due to the relative resilience of the US economy, and the fact that US unemployment is still very low by historical standards.

Last week’s US retail sales numbers would appear to reinforce the belief that despite rising prices the US consumer is still spending, despite cratering consumer confidence. Every month this year, except for May, US retail sales have been positive.

Nonetheless, despite the rebound seen last week for European and US markets, the rebound remains on very shaky ground, and is likely to face further tests of its resilience this week.

In the wake of last week’s disappointing July flash PMIs, the latest German IFO business survey is expected to pile economic gloom on top of economic gloom for Europe’s largest economy.

German business confidence has been weakening for several months now, and while the deterioration has been gradual there has been little evidence of any sign of an improvement, against a backdrop of the threat of Russian gas being cut off.

We’re not expecting an improvement today either, and while we’re not at Covid lockdown levels of pessimism it can’t be too long before we slip back towards levels that we saw during June and July 2020.

Forecasts are for a deterioration in business climate to 90.1, current assessment, 97.5 and economic expectations to 83.

While there are concerns about increasing pressures on headline inflation, as well as higher PPI inflation in the UK economy, on the latest CBI measure of industrial trends data, selling prices have been falling, peaking at a record high of 80 in March, they are expected to fall further in July to 55, from 58 in June, albeit still at very elevated levels.

Industrial orders are also expected to slip back to 13 from 18 in June, with the UK economy facing challenges equal to, but probably not as bad as the rest of Europe, not that you’d know it to hear some of the narrative being spun by some in the media.     

EUR/USD – tried and failed to push through the 1.0275 area last week, before sliding back again. The main resistance still remains up at the 1.0340/50 area. The bias remains for a move below 0.9950, towards 0.9660, while below 1.0350. 

GBP/USD – found resistance at the 1.2060 area last week, before slipping back. This area remains a key resistance area. A move through this resistance area targets the 50-day SMA, and down trend from the February highs. Support remains at the 1.1870 area, with the bias remaining towards the downside while below the 50-day SMA.

EUR/GBP – spiked up to 0.8586 just shy of 0.8600 area resistance last week, before slipping back. As such the bias remains lower due to the failure to close above the 50-day SMA. While below 0.8600 the bias remains for a drift back towards the recent lows.  

USD/JPY – decent reversal last week after failing at the 139.40 level. A break of 140.00 targets the 145.00 area. Rebounded from the 135.50 area last week with more solid support at the 134.80 area. 


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