 Good morning. Welcome to CMC Markets on Friday the 9th of July and this quick look at the week ahead beginning the 12th of July with me Michael Hueson It's been a fairly volatile week for equity markets all told We've seen a continued decline in US Treasury yields it actually would actually now make for successive weekly declines and While the first two weeks Where I think a little bit gradual I think over the course of the past couple of weeks This decline has started to gain a little bit of added impetus. I think that's no better borne out By this chart that I'm going to I'm about to show you here This is the US 10 year yield chart and obviously it's a daily chart So it's fairly fairly straightforward if I change it to a weekly chart This is a trend that has sort of been in place For quite some time. I do digress slightly. We did see we've seen some gradual declines We saw a bit of a rebound at the end of June but see the decline that's pretty much been in place since those peaks in late March early April Would appear to suggest that the market is starting to price out the reflation trade and when you consider The overarching narrative of the last quarter has been reflation concerns Long-term yields have actually been going in the opposite direction Or be it after a very strong start of the year. I think it's important to remember that I think in the context of Where we are now and where we were we are still very much Up on the year when it comes to yields, but certainly if you look at the last four months Yields have been slowly coming lower now. Obviously. We're only a few days into July now So it's too soon to draw any Particular conclusions from the recent price action But I think the fact that we've seen such a big decline Over the course of the past couple of weeks suggests that markets are starting to get a little bit spooked By the prospect that the reflation trade may be dead or dying now I Don't think we're there yet. I think there are concerns about a slowdown in the global economic economic recovery And I think a part of the reason I think why There are these concerns Is the rising cases of the Delta variant? particularly in Asia and we've got a state of emergency being declared in Japan And let's not forget the Olympics starts in two weeks. I mean whoever thought it was a good idea to have the Olympics Is anybody's guess but it now looks like that these Olympics will take place behind closed doors Which you know while sympathise on one sympathisers with the athletes Well, do you really want to be in in a country that's got a state of emergency and is locked down in orbit name? We've also seen Thailand introduce new measures to tighten restrictions in South Korea There's also announced tougher restrictions in Seoul earlier today. So I Think the picture is of Rising cases in Asia in a largely unvaccinated population Against a backdrop here in Europe the UK and the US where the economies Starting slowly and surely to reopen though. I estimate. I do have concerns about the fact that Europe is reopening at a time when Vaccination rates are probably a good three or four weeks behind the UK's For now the 19th of July reopening for the UK economy does look as if it's going to take place as scheduled restrictions are continuing to Get loosened despite the fact that the caseload the caseload is rising, but I think what's important is Less about the caseload and more about the hospitalizations and while the caseload is Back at the levels that it was in January The hospitalizations aren't rising anywhere near as fast. So certainly the vaccination is the vaccination program is having an effect and assuming that hospitalizations don't rise to Difficult levels then I think I Think the fact is that we will probably continue to see Restrictions east and that should be and that positive for the UK economy though recent economic data this morning's economic data out of the UK from May showed a slightly weaker pace of growth Then was expected in some of the early estimates we can see that in Today's weekly market calendar if we look at the month-on-month GDP numbers for here We're expecting 0.8 percent We've got 0.8 percent. We're expecting 1.5. So we fell short by 0.7 percent GDP year-on-year again slightly disappointing Came in slightly below expectations there index of services below expectations construction output missed again and as did industrial output and Manufacturing output which sort of was a little bit Flies in the face of the the PMI numbers that we've seen coming out from market But I think one of the things we have to look at When we're looking at the PMI numbers of purchasing managers index numbers for the UK is That they they don't include the motor sector Which makes up around about 16 to 20 percent of the UK economy So the reason those manufacturing and industrial production numbers are as weak as they are is because they do include The the the motor sector which is obviously suffering from a variety of shortages Semiconductors chipsets and what have you which is affecting the output there And that's why you're seeing the prices of used cars go up simply because there's a shortage of supply of New vehicles nonetheless despite the weakness there the services PMIs that we saw earlier this week have by and large Been fairly positive That being said we have seen a very very choppy week in terms of Equity markets and that's no better borne out by this week's move in the footsie 100 or the UK 100 as I like As we like to call it This is Thursday's price action Made a new high up near to 7100 on Thursday before slipping back quite sharply on the back of these concerns a About Rising Covid cases in Asia slowing down at the global economic recovery I don't know why I've got a five-minute chart there. That looks utterly ridiculous. Let's change it to a daily chart Here we go. So this is the price action of this week. I'm very strong down move yesterday bit of a rebound today and If we look over the course of the past month or so we can see that we've seen some fairly decent swings Albeit in a broadly 200 point price range and what that's telling me essentially is the price action Yeah, investors are undecided as to the overall direction when it comes to European markets Despite the fact that we've seen more record highs this week for the S&P 500 and the NASDAQ so As far as European markets are concerned and concerned and the FTSE 100 in particular, I'm still broadly constructive Decent support in and around 7106,980 apart from these little brief blips below there And in the short term again 7200 that remains the key barrier on the top side. So I think stripping away all of the narratives and We're hearing an awful lot reflation trade this growth scares Deflation what have you The most important thing amongst all of this is the price action and Despite all of the volatility down one day and up the next We are thus far respecting the broader range that we've been in over the course of the past Four to five weeks and until we break out of that range It's probably eminently sensible to continue to play it from that perspective. So that's the FTSE I'm still broadly constructive while we're above 6980 The DAX is also seeing a fairly decent Rebound today as well. And again, it's a similar sort of story for European markets while US markets continue to look fairly well supported We have got European markets, which are broadly trading sideways And there certainly are concerns about the global recovery more broadly China cut its reserve requirement ratio This morning by 0.5 by 50 basis points Which suggests that the Chinese authorities are concerned about weakness in the Chinese economy And that may be why another reason why yields have started to soften a little bit Simply on the basis of the fact that we're not going to get a stronger recovery as was originally being priced and that is now being repriced in the bomb markets and equity markets Striving to make sense of what's likely to happen next. So looking at this chart here as we see it Again, it's a similar sort of story as we've got in the FTSE 100 fairly decent support in and around 15,270 that coincided with the low there and there but also fairly decent resistance up around 15,800 As it can be seen from these daily candles here. So the broader narrative I think for European markets, they're in a range and Until we can get a clearer steer Of how the summer months are going to play out on what the economy is going to look like in The second part of this year and what essentially the central bank reaction function will be with respect to the changing economic conditions that are likely to come about Towards the end of Q3 and as we head into Q4 It's going to make it. I think it's going to make for a highly uncertain and quite choppy trading Arrangement over the course of the next few months if we look at the S&P 500 for example, we're still very much in an uptrend mode As designated by this daily chart here. Now. We've got a very strong bearish reversal there That's nothing new. We've seen them on fairly regular basis over the course of the past few weeks. So You know in essence We I still remain very much of the opinion as Designated by this decent uptrend line here that we remain very much in a by-the-dip mentality when it comes to US markets and it's a similar sort of story or The NASDAQ 100 as well as designated by this daily chart here And what's noticeable about this particular daily candle here is that even though we posted a bearish reversal we've closed well off the lows of the day and We've respected that trend line there. So we've seen significant Divergence on the oscillator That's probably likely to going to continue to be the case until such times As we see some clear evidence of the change in trend at the moment We're just not seeing that so again the trend is your friend So stick with it Japan 225 slightly different story Or be it we are respecting the overall support levels in and around this 27,500 area I have drawn that through there because it's a very long lower shadow And we've also got the 200-day moving average as well. So that that's likely to be significant on any move Towards the downside what's significant is yesterday's chart move lower has been pretty much reversed today So it pays your money it takes your choice, but ultimately equity markets Probably still look fairly decent still look a fairly decent prospect In the event that We see a slowdown or realignment of expectations about the rebound that we're seeing in the global economy so that brings me on quite neatly to the the upcoming week and the week ahead because We've got another busy week of data And I think in light of the triple R cut that we saw from the Chinese authorities Earlier this morning the state of the Chinese economy is likely to be I think a key factor in In in the markets when we look ahead to the upcoming week We've got Q2 GDP on the 15th of July as well as retail sales and industrial production for June So the fact that the Chinese authorities have cut the triple R suggests they are concerned that the economy is slowing down And it's in it and it's in a place that they don't really want it to be and they want to try and ease Monetary policy conditions now earlier this year. There was some surprise that China's estimates for 2021 GDP growth was set at around 6% some arguing it was too optimistic another saying it was too conservative particularly since there's been little signs of a second wave I was one of the people who thought that it was actually too conservative. It looks like I may have been wrong And I think that's one of the important things you have to take when you look at markets You have to admit you have to own it when you get it wrong And it looks like that my optimism over the Chinese economy was slightly misplaced So what do we do? We basically readjust our expectations So the jury remains out on how well the Chinese economy is actually doing But it would suggest that it's not doing as well as Chinese authorities would like it to be Retail sales have been showing some signs of gaining traction Although all of this year's numbers have to be set in the context of the enormous skew Due to the shock of the pandemic lockdowns over a year ago. So You're going to get a very big rebound Based on a very slow numbers that we saw in March April May and June of last year Now industrial production has managed to rebound fairly easily But consumer centipede has been much more cautious in Q1. The Chinese Chinese economy grew by 0.6% Now this week's Q2 GDP numbers are expected to see an expansion of 1% as a quarterly expansion of 1% while June retail sales are expected to slow from 18.3% to 10.0. So it's from 10 they're expected to slow to 10.9% from 12.4% in May So I think that's another warning sign that Chinese Officials are concerned about that retail sales are starting to slow Industrial reduction is also starting to slow as well. They're expecting we're expecting that to come down from 8.8% to 8% So to sum up on 15th July China's second quarter GDP is expected to come in at 1% It was as a 1% economic expansion on top of a 0.6 economic expansion in Q1 So that's the key that that's the key data for China We've also got CPI numbers. Now there was an awful lot of concern earlier this year and until very very recently that CPI was basically running well ahead of consumer's ability to absorb it And certainly if you look at US CPI headline numbers there are currently at 5% and the expectation is if recent PPI numbers are any guide that we might see an increase to in excess of 5% now economic expectations or economist expectations are the US CPI which is due out on the 13th will come in At 5% it will remain steady at 5% Despite the fact that producer prices in may jump to 6.6% and the highest level in over 10 years So there is a little bit of concern that the big rise in PPI will filter through into the June CPI numbers Certainly core prices are expected to increase from 3.8% to 4% but given that even if they do push higher there is now some doubt as to whether or not this will be the high point for CPI before they start to roll over again If you'd said that two months ago, I think the debate would have been somewhat different. The debate would have been well how high can it go Now there is a perception that we're nearing the peak and we could well start to roll over as we head into the autumn So we're a bit of an inflection point when it comes to CPI in the US but as well as CPI here in the UK because not only do we have US CPI We also have US retail sales But we also have UK CPI and US retail sales have been underperforming They've been underperforming quite significantly over the course of the past few weeks and months And that has been a little bit of a concern because for all of the optimism over the US economy the decent numbers that we're seeing when it comes to jobless claims in the labor market and the payrolls numbers which we saw last Friday which were a little bit of a goldilocks affair The expectations around Fed policy Haven't really shifted that much but the dollar has actually started and continued to move higher Now I think the expectation around the dollar moving higher is more to do with the fact that interest rate expectations for other central banks tightening policy are diminishing more than the Fed is more likely to tighten And that in essence is helping to support the dollar because if you look at it in the overall round of things The fact is that it's more likely that the Fed will still tighten policy before any other central bank And that is essentially why you're finding that the dollar is benefiting from that It's not that the expectation is the Fed will tighten first. It's just that other central banks are probably going to Be much much later to the party than was initially thought saying for example the Bank of England. So With that in mind US retail sales Is expected to show another decline in June and that's disappointing expecting to see a decline of around about 0.5 percent and coming on top of a decline that we saw in May of 1.3 percent That suggests that while The US economy is recovering US consumers remain very very cautious about spending money going forward So that suggests to me that We could get it's going to be a very very tough call to Think about when it when when we're going to get a tapering of monetary policy when it comes to the Fed And certainly the rates aren't going up anytime soon. So really it's just a question of When central banks are likely to pair their bond buying programs In terms of CPI for the UK going to move to the UK economy now So we've seen the US dollar index here the CMC dollar index The line of lease resistance here suggests we're going to continue to see dollar strength over the course of the of the next few days When it comes to sterling, it's a slightly more next story We can see that here. It's been slowly trending lower But for now it appears to be respecting the support line in this channel that I drew A few days ago So looking at UK CPI we can expect to see another jump From may we came in at 2% in May We can expect to see another jump to around about 2.3% for june However, if the US experience is any guide and we do start to see some measures Of a topping out Then the high watermark for UK CPI we could We could well be fairly near near to it And certainly I think when we looked at the latest Chinese inflation numbers The headline CPI numbers do appear to be just starting to show signs of softening As do the PPI numbers. So again, that feeds into the narrative that The inflation pressures that we've seen over the course of the past six months May be near a topping out and we will know whether or not that Perception is true as we head into The third quarter certainly there's no there's no evidence of food price inflation Which is a good thing Um, it's not to say that we won't we won't continue to see sharp upward moves In the headline number over the coming months Certainly PPI has been trending higher since the end of last year Um in april it might 9.9% And it's around, you know, it's around about 10% now So it really just comes down to how much Consumers or how much manufacturers Can afford to pass through in terms of higher costs UK unemployment again The furlough numbers are skewing that slightly But on last estimates, I would imagine There's around about 5% now of the UK population currently on furlough UK unemployment is expected to edge back up to 4.8% in May What was encouraging in the jobless claims numbers for Um for may was that they fell back to 6.2% which was a sharp fall from the 7.2% we saw in march So we've seen a big drop in jobless claims numbers And that should be positive as the UK economy gets set for a the big opening up on the 19th of july Going forward so There's an awful lot I would suggest to be positive about And that's before we even start to think about the euros 2020 This weekend England versus Italy really looking forward to it. It's coming home Hopefully that will give the UK economy a significant boost over the course of the next few weeks With particular attention, I'd like to draw your particular attention to Um The pubs like marston's mitchell and butlers. We've also got Sainsbury's test goes and morrisons should have done increased sales of of beer and what have you bookies should have done well Um as we'll have delivery companies like uh uber eats deliveroo Just eat takeaway You know right result could well see a nice decent uplift as we head into the summer holidays But i'm digressing ever so slightly. We've also got a host of earnings announcements due out with the start of us earning season and in particular Um, I'll be paying particular attention to us bank earnings and the reason I would be paying particular attention to them was because of The federal reserve at the end of june Relaxing all restrictions on buybacks and the paying of dividends. Now you would have thought That would be positive for bank shares, but This was largely expected And it's important to remember that um just before I'm the fed confirmed the relaxation of those restrictions CEO jamie diamond of j.p. Morgan was very keen to stress that the bank's Second quarter performance was unlikely to match that of the first quarter Trading revenue lower than the consensus estimates of 6.5 billion Lower yields and volatility would have impacted turnover And also he expressed concern About loan demand and income after a bumper q1 the trend over loan demand Was notable in this q number q1 numbers, which the bank said was likely to remain challenged So deposits of right Deposits rose 24 percent year on year to 2.3 trillion dollars in q1, but what was notable I think and what was particularly I'm concerning overall was the fact that um Uh Lending to businesses small business lending was down 50 Compared to the same quarter a year ago. So while the shares appear to be rising on the basis of expectations of higher payouts It's also worth noting that the underlying q2 numbers point to challenges For the u.s economy due to concerns about higher interest rates Well, that's not a concern at the moment higher interest rates because yields are lower But that is a concern yields are lower and a compressed yield curve when it comes to profit margins So when the when we get the earnings numbers, we need to pay particular attention to this support area here On the jp morgan daily chart around about 147 because if they guide lower for q3 as well We could start to see a roll-off In u.s bank shares which have been on an absolute tear over the course Of the past few weeks Though having said that they've gone pretty much sideways since march april similar sort of story for City group more broadly nice little uptrend here, but again evidence is starting to roll over So keep an arm 200 day moving average there and a similar sort of story morgan stanley This is a nice little trend line here that i've drawn in Be very interesting to see whether or not we take out those loads of the 18th of june or whether or not we respect the uptrend That we currently have been in so we've got To summarize we've got jp morgan on the 13th of july along with goldman sacks We then have city group on the 14th of july. We have a morgan stanley on the 15th of july And let's not also forget. We also have the latest numbers for coin base Crypto coin base and those particular shares will be interesting in the context Of how the shares have performed In the wake of the direct listing that we saw earlier this year the They basically dropped below their Their in their nasdaq indicative price easy for me to say All the way back All the way back in june Now they went to a low of around just above 200 dollars since then they've been trading sideways And i say it's been three months that we've seen a little bit of a pullback Over the course of the past few days is with bitcoin just about holding above that 30 000 level But obviously there has been some concerns about increased regulation when it comes to crypto the crypto space And chinese crackdowns Increased regulation could weigh on the numbers in q2 the q1 numbers came in broadly as expected so there is a risk that the Numbers that we've seen and the declines that we've seen in crypto could impact the numbers for q2 in coin bases earnings announcement when it's released on the 15th of july Quickly have a quick look at gold Seen a nice little rebound in that on the back of the lower yields I've actually been struck by the fact that we haven't rebounded particularly strongly despite the sell-off in yields But we're also approaching very key resistance between the 50 and the 200 day moving average So depending on what yields do I think we'll dictate what gold prices do but for the moment 1825 is likely to be a significant barrier going forward. So also we've seen some welcome respite In terms of oil prices. They finally do appear to be showing some signs of topping out But we do need to get back below this 72 50 area here To signal a much deeper correction Yeah, we hit a peak earlier this week at around about 78 dollars a barrel We don't really want to go too much above that But I think concerns about the global recovery concerns about a slow rate of economic rebound Could actually see these numbers start to roll back down again particularly if opec plus can finally agree a consensus on production On production increases going forward So that's pretty much it. Sorry I've gone on for a little bit longer than I expected to But I hope everybody has a great weekend And I'll see you all same time same place next week And let's hope England win the football on Sunday fingers crossed. I'll certainly be drinking to that. Thanks very much