Last week saw US equity markets move up to new record peaks, helped by the goldilocks scenario of better than expected earnings reports, economic data, and an assumption that the Federal Reserve is on the cusp of cutting rates when it meets later this week.
The resumption of US, China trade talks is also welcome at a time when it was feared we might see a further escalation in this long-running saga, with expectations now set at a more realistic level, with the prospect of some form of status quo likely to extend into next year, in a case where we’ve gone from, in the words of US Treasury secretary Steve Mnuchin, 90% done, to watch this space.
European markets also had a good week with the French CAC40 hitting its best levels since 2007 in anticipation that further easing is likely to be coming from the ECB at its September meeting.
The focus on central banks continues this week, as attention turns to the US Federal Reserve, the Bank of Japan, and the Bank of England, after last weeks mixed messaging from the European Central Bank, which saw the euro, as well as bond yields across the region seesaw sharply, with German 10-year yields hitting a record low of -0.41%.
With the IMF also downgrading its expectations for global growth last week the outlook overall continues to look murky, though the US has continued to show its resilience, after a better than expected Q2 GDP showed that the economy grew 2.1%, with personal consumption showing a rise of 4.3%, while measures of price inflation jumped from 1.1% in Q1 to 2.4%.
If the US consumer is worried about the outlook, last Friday’s numbers don’t appear to reflect it, as attention shifts to this week’s Federal Reserve rate meeting where the FOMC is widely expected to cut rates by 25bps, though based on last week’s economic numbers one has to question as to why they feel the need to, given the rebound in the inflation component of GDP.
This resilience certainly appears to be reflected in the strength of the US dollar which is back to within touching distance of its best levels this year, and two-year highs, and would appear to reflect the belief that any Fed decision to cut rates this week, is unlikely to be unanimous.
The pound could well come under further pressure this week, ahead of the latest Bank of England rate decision and inflation report. No change is expected this week given the weakness seen in the economic data for April and May, which is likely to make the banks forecasts even more downbeat that they were in May. The ramping up of “no deal” rhetoric and preparations over the weekend by the new Prime Minister and his cabinet, is unlikely to help sentiment and likely to reinforce concerns that the UK is on course to leave the EU without a deal at the end of October.
Much is being made of the attempts by various MPs to prevent such a scenario from happening, with plenty of people claiming that parliament would prevent such an outcome. While that may be true, the only way that outcome can come about, is if MPs vote for a deal, or revoke article 50, something they have been so far been reluctant, or unable to do.
EURUSD – slipped as low as 1.1101 last week before rebounding back to the 1.1190 area, however the nature of the rebound remains weak. The bias remains for a move lower towards the 1.1000 area, while below 1.1280. We need to see a recovery back above 1.1280 to retarget the 1.1400 area.
GBPUSD – continues to come under pressure slipping to a two-year low as the risk grows for a move towards the 1.2100 area. Needs to hold push back above the 1.2580 area to stabilise and retest the 1.2700 area.
EURGBP – found support just above the 0.8870 area last week, but needs to get back above the 0.9010 area to look at a retest of the highs this month above 0.9050.
USDJPY – needs to push up through the 108.80 area to signal a retest of the 109.20/30 area. Bias remains to the downside and the 106.00 area, while below the 109.20 area.