Stocks have retreated from their record highs amid declines across Asia and as a drop in crude oil prices weigh on Euro shares.
Europe’s ‘single unit’ (€1.1844) has edged lower after yesterday's significant jump higher, while the mighty dollar stabilizes somewhat as the market awaits U.S labor market data.
Ahead of the Bank of England (BoE) monetary policy announcement (07:00 am EDT), the pound (£1.3256) has added to gains, rising to its highest in ten months outright after a purchasing managers’ survey showed activity in the all important U.K services sector continued to increase last month.
Note: BoE’s Carney could signal a more ‘hawkish’ tone when the bank announces its policy decision and releases its quarterly inflation report. BoE rates are expected to remain on hold.
1. Pound at multi-month highs
The FX market is relatively quiet with a focus on BoE rate decision. The USD Index continues to try to pull away from its 15-month lows attributed to political turmoil in Washington and by largely uninspiring U.S economic data.
EUR/USD (€1.1845) is consolidating after hitting fresh two-year highs yesterday (€1.1905). The ‘single unit’ has found support from expectations that the ECB would eventually begin phasing out its ‘easy’ policy.
Sterling (£1.3231) is firmer ahead of the BoE decision. It’s aided by a beat in its PMI services data. The BoE is expected to keep policy steady amid political and Brexit uncertainty with the vote seen at 6-2.
Note: only eight members are voting this time around. Hogg’s replacement has been announced (Ramsden), but he would not join the MPC until next month.
Note: One of the three dissenters at the last meeting (Forbes) term ended and her replacement (Tenreyro) is widely expected to vote with the majority. Members McCafferty and Saunders are again expected to dissent calling for a +25bps rate hike.
2. Stocks see red
Stateside yesterday, the Dow Jones Industrial Average broke above the psychological 22,000 print for the first time, supported by Apple’s stellar quarterly results.
In Japan, the Nikkei fell (-0.3%), hit by tech shares selling after ‘Apple effect’ fades, while the broader Topix ended nearly flat.
In Hong Kong, stocks were weighed down by financial and energy shares. The Hang Seng index fell -0.3%, while the China Enterprises Index lost -0.5%.
In China, stocks retreated on a soft services sector report and liquidity concerns. The blue-chip CSI300 index fell -0.9%, while the Shanghai Composite Index lost -0.4%.
Note: China July Caixin PMI Services was 51.5 vs. 51.6 prior.
In Europe, most bourses have opened on the back foot and have continued to move lower as energy stocks are weighed on by oil price. With gold underperforming is putting some pressure on materials stocks. Market focus now turns to the Bank of England (BoE) rate decisions and tomorrow’s U.S payrolls.
U.S stocks are set to open in the red (-0.1%).
Indices: Stoxx50 -0.3% at 3,447, FTSE -0.1% at 7,402, DAX -0.4% at 12,135, CAC-40 -0.1% at 5,103, IBEX-35 -0.6% at 10,452, FTSE MIB +0.3% at 21,615, SMI +0.1% at 9,128, S&P 500 Futures -0.1%
3. Oil prices rise, but remain capped, gold lower
Oil prices have rallied a tad overnight, supported somewhat by renewed signs of a gradually tightening U.S market. However, ongoing high supplies from OPEC producers continue to cap gains.
Brent crude futures are at +$52.56 per barrel, up +20c, or +0.4% from Wednesday’s close. U.S West Texas Intermediate (WTI) crude futures are at +$49.79 per barrel, up +20c, or +0.4%.
Yesterday’s weekly report from the EIA data showed that U.S. output rose while crude inventories fell by less than analysts expected; however, demand for gas was again stellar, fueling a sizeable decline in product stockpiles.
Gold prices are under pressure (-0.5% to +$1,260.36 per ounce) as the dollar inches away from its multi-month lows. Signs that the U.S economy is strengthening has some investors focusing on risk assets.
Note: The prudent investors will continue to look for further evidence of stronger U.S inflation numbers before they get a little bit more optimistic about a rate hike, which remains a natural headwind for gold prices.
4. U.K yields indicate the BoE decision a non-event
The fixed income market is only pricing +10% odds of a BoE rate rise this morning – to some that’s a tad too low. While a rate hike is not the central theme, inflation forecasts are likely to be adjusted a tad higher, which can only be looked through if you believe there is enough spare capacity and slack in the economy. The market will also focus on the vote, as markets ponder whether chief economist Haldane will move into the ‘hawkish’ camp.
Elsewhere, the yield on U.S 10-year Treasuries has backed up +1 bps to +2.28%. Germany’s Bund 10-year yield rallied +1 bps to +0.50%, while U.K’s 10-year Gilt yield advanced +2 bps to +1.24%, the highest in a week.
5. Global inflation hits lowest level in eight years
Data this morning from the OECD indicates that inflation in the G20’s largest economies, which account for most of the world’s economic activity, fell to its lowest level in almost eight years during June. Consumer prices were +2% higher than a year earlier.
Note: The last time inflation was lower was in October 2009, when it stood at +1.7% as the global economy was starting to emerge from the sharp downturn that followed the global financial crisis.