European economy set to show a contraction
By Michael Hewson (Senior Market Analyst at CMC Markets UK)
Over the past few weeks ago we?ve seen markets put to one side concerns about global growth on the basis that central banks remain prepared to act to underpin recent gains in equity markets. This confidence was reinforced last week by disappointing Chinese economic data; however the failure of Chinese authorities to react to last week?s data over the weekend, as well as disappointing Japanese GDP numbers early this week, continues to see traders exercise caution over this expectation and start to book some profits.
Today we get to see the extent of the effect that the crisis in Europe has had on the two largest economies in the Eurozone with preliminary Q2 GDP numbers for France and Germany, and the results aren?t likely to be very positive. If anything the poor numbers are likely to reinforce a reluctance to release the purse strings by Germany on the basis that even their generosity has its limits, as growth stalls.
French Q2 GDP is expected to slip back 0.1% for the second quarter, while German Q2 GDP is expected to remain an outlier, gaining 0.1%, well down from Q1?s 0.5% growth, however even these estimates seem a tad optimistic.
While it can be argued that GDP data is largely rear view mirror stuff, the same can?t be said for ZEW data, and German ZEW economic sentiment data for August is expected to remain firmly negative at -19.4.
The broader euro zone Q2 GDP number is set to make even gloomier reading, showing a contraction of 0.2%, while industrial production data is set to show a decline of 0.7% for June, reinforcing the fact that Europe?s crisis is slowly becoming systemic and that any solution is likely to ultimately unachievable under the auspices of existing treaty obligations.
Last week in the UK the latest Bank of England inflation report suggested that UK Inflation would continue to come down over the course of the next few months, and the expectation today is for both CPI and retail prices to do just that, if last week?s report is to be believed.
The hope is that on this occasion the Bank of England is correct, unlike the last few years where their predictions have been somewhat wide of the mark.
UK CPI is expected to slip 0.1% in July with the year on year figure coming on at 2.3%, down from 2.4% in June. Given the recent rally in oil prices this does seem somewhat optimistic, and we could see a rebound in prices and not a fall, as many economists expect. Even core prices are expected to remain sticky, stuck at 2.1%, unchanged from the previous month.
In the US the latest retail sales numbers for July will be scrutinised for any evidence of a change in consumer spending patterns. After seeing retail sales number slide for the last three consecutive months, it would appear that the US consumer is remaining reticent when it comes to parting with their cash dollars. We do expect to see a rebound in June with expectations for a rise of 0.4%, but this would only recover the losses of 0.4%, seen in June.
EURUSD ? the single currency remains hemmed in between the 55 day MA and resistance in the 1.2430/40 area and 1.2220 trend line support from the 1.2045 lows. A break of support has the potential to retarget the 1.2150 area, as well as the 1.2045 lows.
We remain mindful of the bullish weekly candle from two weeks ago which still suggests we could be gearing the market up for a euro rally, but any break below here targets 1.1880.
The key level on a monthly close remains the 200 month MA at 1.2060, the July lows.
GBPUSD ? cable remains stuck between the 200 day MA at 1.5725 and resistance between 1.5740/80 and the trend line support from the 1.5270 lows at 1.5480. Above 1.5780 and we could see a move to 1.5910.
A break below the trend line support at 1.5480 suggests a move back to 1.5270.
Only a close below 1.5240 signals a risk of a return to the July 2010 lows at 1.4950.
EURGBP ? the resistance at 0.7880 continues to cap the single currency and while below this level the support at 0.7820 remains the key barrier to a test of the downside and previous lows at 0.7755.
A break of 0.7880 is needed to retarget the 55 day MA which remains strong resistance at 0.7960, along with trend line resistance at the same level from the February highs at 0.8505.
USDJPY ? dull, dull, dull the US dollar remains becalmed between support below 78.00, and resistance above 79.30, despite the fact that Japanese GDP for the most recent quarter came in below expectations. The Japanese economy grew at 0.3% for Q2, half market expectations of 0.6%.
The cloud support at 77.30 and the May lows at 77.60 remaining a key level. As long as this holds the downside, the risk of a rebound remains quite high.
A move above the 79.30 level brings the 80.00 level back into play and then by definition the main resistance at the top of the weekly cloud at 80.45.
Equity market calls
FTSE100 is expected to open 28 points higher at 5,860
DAX is expected to open 35 points higher at 6,945
CAC40 is expected to open 11 points higher at 3,435
FTSEMib is expected to open 84 points higher at 14,617