Trade malaise ahead of US CPI

Summary

European stock markets struggle to remain in a holding pattern whilst U.S. indices continue to inch higher.

Europe adrift, U.S. near peak

Trade malaise could last for many more months yet, though it’s also worth recalling that it is peak summer holiday season, pivotal macroeconomic releases this week are thin on the ground and the earnings season for the most dominant groups is in its closing stages. These conditions are the contours for a flaccid performance by European stock markets this week. The current mix of thin gains and losses trims meagre advances since Monday to well under a percentage point for Spain’s IBEX and Germany’s DAX, Paris’s CAC and Lisbon’s PSI, whilst FTSE 100 and Milan’s FTSE MIB lead the region by grinding slightly higher. Wall Street stock index futures are fractionally aloft, but from a position of relative strength. The S&P 500 is half a percentage point from 26^th January’s year high. The possibility that U.S. shares could regain that milestone and perhaps set another, underlines once more that European markets are faring worse during the trade dispute. The S&P 500 has now eked out a 6% gain for the year compared to, say, the DAX’s 1.8% fall and FTSE’s 1.6% slog. As the yuan resumes its plunge after barely pausing to acknowledge July’s stronger than forecast dollar-denominated exports, European equity markets are set to continue advancing in sickly fashion on debilitating trade anxieties, particularly as a key inflection point approaches. The imposition of $16bln in U.S. tariffs scheduled for 23^rd August is further overhang to sentiment.

Dollar pause

Strong fundamental catalysts will be lacking for the remainder of Wednesday given the light macroeconomic and corporate calendar. That’s more incentive for investors to continue poring over the barrelling dollar ahead of the data highlight of the week – Friday’s U.S. consumer price inflation. Meanwhile, greenback consolidation brings little cause for concern for dollar buyers. Few alerts will sound so long as yen strengthening holds off from high-to-mid ¥110 levels that have supported the dollar since late last month.

Italian pressure rebuilds on euro

Furthermore, at some point, the extent to which European politics and sluggish economic recovery have flattered the year’s one-way FX trend will become clearer, but not yet. In Italy, the backseat driving strategy of the coalition is becoming increasingly clear and this adds weight to the euro. Consensual Eurozone relations are maintained on the surface whilst rhetorical and budgetary envelopes are pushed in the background—undermining the PM and economy minister in the process if necessary. Italy’s 10-year BTP yield is on a fourth day of declines after spiking slightly above 3% last week, the highest since late May mayhem. But a wider view shows the unmistakeable elevation of a market on tenterhooks. The spread to benchmark German 10-year Bund yields is some 40 basis points from the widest of the year—29^th May’s 282.80 basis points—yet still too close for euro comfort. Under these circumstances, it’s difficult to ascribe probability of much further traction to what looks like a mild squeeze of euro sellers after Monday’s close tag of late June’s spike low ($1.1525). Rallies by and large are still being sold and will continue to be till the psychological upset from 14^th June’s 290-pip plunge (high to low) is expunged.