 Good morning. It's Friday the 7th of July and welcome to this look at the week ahead beginning the 10th of July with me Michael Houston chief market analyst at CMC markets There's quite a bit to get through After this week's market carnage with European markets on course for their worst weekly performance Since March the DAX has fallen to its lowest levels in three months while the FTSE 100 has slipped to within touching distance of its March lows and we can see that Blade out in this chart here as you can see I've thrown in the move from the October lows to the record highs back in February Now quickly that move has unwound. We're now approaching 61.8 February retracement level of that entire up move the move That we saw the bounce off Back in March, I think what's particularly concerning about this particular Chart is the fact that the C100 has struggled to rally and make new highs and that for me, I think is a bit of a warning sign when it comes to what? financial markets European markets are likely to do next because You know while the FTSE 100 also underperformed on a half year basis We've also started to see evidence of a breakdown in other European markets as well And that's before we even get today's non-farm payrolls data But before we get on to that getting slightly ahead of myself because obviously we need to Understand why in the past two or three days markets have suddenly Lost the plot so to speak because had a fairly decent first half Despite the sell-off this week in European markets US markets, although weak haven't fallen by anywhere near as much and yet their Valuations are an awful lot higher. So what gives well? If you've got the answer, please let me know because I'm scratching my head We did see a fall in US markets this week I think the common denominator has been pretty much a concern about An upcoming recession China data this week has been particularly Disappointing and the reluctance of Chinese authorities to consider a significant stimulus plan I think is raising concerns about the likelihood of them actually meeting the GDP targets before this year But more broadly, I think The the main reason for the sell-off is the markets interpretation of Not only the Fed minutes that we saw on Wednesday. They shouldn't really been any surprises from them, but The market appears to have reacted as if they were They showed a much greater cork us Further tightening than was thought the direction of travel was given added momentum on Thursday with an absolutely blowout ADP payrolls report As well as a fairly fairly decent ISM services report so You've got a you've got a number of things that are driving yields higher And that's no better borne out by This chart here. This is the US two-year yield We can see that it's retested the highs back in March What's particularly interesting about this particular chart is the fact that even though We retested those March peaks we actually closed well off the highs now There's a lot. There's a lot to Breakdown in the way this bomb market move has played out We can look at the US two-year. It's a market surprising in essentially the market surprising in much more aggressive Fed tightening than was originally thought to have been the case a month ago Payrolls report was certainly a decent report But when you actually look at it a little bit closer An awful lot of the Jobs that were added Were in travel and leisure and hospitality which generally tend to be at the lower range of the wage scale When it comes to wages and certainly the wages numbers in the ADP report were lower Than the previous month. Yes, still fairly high above the six percent But certainly heading in the right direction But nonetheless We've seen a big spike in yields. So the US two-year at its highest level in 16 years We also saw a similarly robust move higher in UK two-year guilt yields as well I mean we're well beyond the October highs now and Levels last seen back in 2007 2008. We were at one stage above five and a half percent and Essentially what you've got is markets pricing in a higher Fed funds terminal rate and a higher Bank of England bank rate so That funds markets are now looking at potentially not only a July rate hike. Let's forget about that. That's priced in That's going to happen But it's really what comes after that the markets are concerned about similarly for the Bank of England It's really it's not about What's going to happen in July and August when it comes to rates? It's how much more the central banks likely to do over and above The rate hikes that are already priced in and certainly I think UK markets are getting out way over way over way over their skis when it comes to expectations of Bank rate currently it's a five percent. I Can potentially see bank rate going to five and a half Any more than that and I think you're going to create a smoking ruin in the UK economy The housing market will fall quite substantially and quite simply What we're seeing here from central banks is an overcompensation For the fact that they were late very late in recognizing that inflation was not Transitory and was likely to remain higher for longer. They've been given an awful lot of criticism for that quite rightly and Now they're looking to try and overcompensate for that try and restore Some credibility by saying look, we're serious about our inflation mandate We're going to push it back to two percent without really asking the question Whether or not they should be trying to push it back to two percent in such a short space of time I think that two percent inflation target was a good target for its time But I certainly think it's unrealistic to drive it back to two percent quickly Given the current challenges facing the global economy in the UK and US economies because ultimately when we're talking about Transitioning to net zero you're not going to be able to do that make the economic changes to The economy while at the same time keeping inflation in check the Russian invasion of Ukraine This change global supply chains forever You are not going to have prices returning back to the levels that they were pre-pandemic It is not going to happen. It's not realistic and ultimately central banks need to Get acquainted and get comfortable with that fact you can get inflation back to the two percent target But you know that you don't need to do it within the next one or two years You may have to get used to the idea That's interest rates are likely to remain higher for longer So you may be able to get inflation back to four percent three and a half four percent or even three percent in the case of the US Because we've got your CPI next week Getting that it getting it to that extra one or two percent From the three or four percent which I think it's likely to be over the course of the next two years is Going to take a lot longer and perhaps a little bit of patience Might save an awful lot of economic pain for an awful lot of people who can probably least afford it We don't know the effects the full effects of the five percent of rate hikes that have already been pushed through simply on the basis of the fact that US operates a fixed rate mortgage system So ultimately people won't want to move if it means that they have to come off their low fixed rate mortgage onto a higher fixed rate mortgage similarly here in the UK We have a slightly shorter term fixed rate mortgage market But we do have a fixed rate mortgage nonetheless and Ultimately while those people who are on fixed rate mortgages and do have savings They're actually benefiting in the short term from higher savings rates, so There is a significant lag when it comes to monetary policy Certainly a bigger lag than was the case 20 or 30 years ago when pretty much everyone was on variables So I think central banks are not taking that into account and ultimately I think they need to do so The Bank of England would be well advised to probably keep rates on hold after the hate the rate hike in August And see what happens if they need if they then need to hike rates again in December by the end of the year Then fine, but at the moment They're flying blind because they do not know how much of the five percent of rate hikes that they've already Implemented and pushed through into the economy How much of that is actually had an effect or will have an effect when it suddenly starts to transmit itself into The economy in Q3 and Q4 anyway rent over we've got We've had ADP payroll support came in at 497,000 well above market expectations. We also had a very resilient Services ISM. We've got non-farm payrolls as well later today and that is likely to be another fairly decent number US unemployment is around about 3.6 percent 3.7 percent and Average average average earnings average hourly earnings is around about 4.3 percent So I don't think there's going to be anything in those numbers That's likely to deter the Fed from hiking again in July in just under two weeks time Of course US CPI next week that is expected to fall back to three percent Yes, core prices are higher But core prices are also expected to decline as well soften as well coming back down from five point five to around about five point two Three they will always take an awful lot longer to come down or slow down. It's only on a headline number 3% US CPI think about that. It was nine point one percent this time last year. That was the peak So extrapolate that out and where the UK peak was Then you could potentially argue that by the end of this year UK inflation could be around about five and a half or six percent given the fact In July the energy price cap comes down in October. It could come down again as well So that could actually shave an awful lot of the current eight point seven percent Which is UK CPI nonetheless? Markets are pricing in the Bank of England could hike rates to as high as six and a half percent. I Really struggle with that. I mean, yeah, the market is pricing it But that doesn't necessarily mean it's going to happen And I think if the if the Bank of England does like to six and a half percent Then it's going to be a very very difficult A few years for an awful lot of people going forward. So I think there's something that really does need to be born in mind When looking at the market pricing I think five and a half percent is probably the limit Of what the economy would stand without creating a smoking ruin And I think the Bank of England really needs to weigh up Way up the probabilities of the damage it might cause Looking at ppi Inflation is coming down You're seeing it in China You're seeing it in Europe. You're seeing it in the us There will be a pass-through effect sometimes a little bit of patience is required And I think the Bank of England the Federal Reserve the ECB could exercise some of that patience that they used in delaying hiking rates in Trying to delay a little bit further because essentially they haven't had the opportunity to see how much Over 500 basis points. They've already done has already impacted going forward. They're constantly backward looking They should start to think about the effects of what they've already done in terms of being forward looking And it's it's a difficult mindset, but it's something that they really need to do anyway Talking and looking at what equity markets are doing with respect to the DAX We've broken out of that nice little support line The term I've highlighted over the course of the last few weeks around about 15,600 Um, that suggests we're probably going to see further weakness back towards You know, I'm not really sure why I put this line in here. Yeah, it coincides with those peaks and those lows there so You could find a little bit of support around about 15,100 But I would suggest potentially we could see a drift down to 15,000 But in the wider scheme of things Given the fact that we've probably gone sideways since april um A move lower would not be the end of the world and we are still well above Uh, the march loads unlike the footsie 100 So it's certainly not the end of the world Certainly seen a little bit of a meltdown in the spike up in yields Which is weighing on the market the big question I think for me is whether the spike up in yields Is sustainable in the short to medium term yesterday the france the cac 40 got absolutely hammered Um, again, we're back down towards the may lows again. We're still above the march lows And we're also above the 200 day moving average So ultimately while we are starting to see a little bit of a fading of momentum We're still above some very key Low points the low points in december the low points in march And obviously the low points in october. So yeah momentum is declining We've taken out these lows here. That is a bit of a worry, but we're still above the long term moving average. So You know this this this correction in european markets Is a little bit worrying But it's certainly not at the moment The end of the world when it comes to future gains going forward us markets Surprisingly Approved to be much more resilient to this move higher in yields And we can certainly see this in the way the s&p 500 has been playing out We have started a rollover. Obviously it was a big down move yesterday But you know big down moves haven't been unusual over the course of the past few weeks We've had them on a fairly regular basis and have continued to go higher. I think the bigger question is um How much longer Can us markets continue to defy gravity because ultimately when you actually look at the fundamentals The earnings numbers the fact that earnings growth is likely to diminish How much longer can markets continue to defy gravity? Well, ultimately We won't know until such times as we until such times as we take out this low here Because at the moment we're still making higher lows We're still making higher highs Which means the uptrend despite the move higher in yields still remains intact and for me What the price is doing is key. You know, you cannot buck the trend. I mean again here We've seen the nasdaq retest those june highs through here So we've made We continue to make higher highs. We continue to make higher lows So again, the key support level is these twin lows back in june around about 14,680 So there are thereabouts If we start to break down below there Then certainly there is potential to see a little bit of the roll over But again, I think much will depend on whether or not the markets continue to price in a much more aggressive Fed Next week's cpi numbers could be very important in that context as could The ppi numbers which come out the day after in fact, I could potentially make the case for The ppi numbers potentially being more important than the cpi numbers. Why well quite simply if the year-on-year numbers Start to pull back to around about two percent And the month-on-month numbers start to go negative like they did in may On the final demand Then you could certainly make the case that the us economy could find That it's heading towards deflation or certainly disinflation at the very least so ppi is on on the 13th And cpi is on the 12th So I think both of those those numbers next week could be important in the context Of the yield story that we've seen play out over the course of the last couple of days So obviously we've got payrolls today. Yes, they'll be important But they won't add to the the sum of overall knowledge when it comes to a july rate hike We're getting that it's really a matter of what comes after that Um, so we've had a look at the key indices going forward. We've also got some fairly important UK data UK wages and unemployment And one of the things that I have been surprised at is despite the fact that UK rates continue to go higher A pound has continued to hold its own And I think one of one of the things that I took away. I think from this What we'll have taken away from this week is that there was a piece on Blomberg the other day That suggested that yes while interest rates higher rates are impacting the mortgage market Because an awful lot of people are on two and five-year mortgages But also Have a high degree of savings There is a bit of an offset there Because ultimately they're getting more for their savings Which is helping to add to the overall income And the mortgage effect That's an as yet kicked in and in effect what they could do with those additional savings is potentially Pay down Some of that mortgage debt to make it more manageable when the fixed rate deal rolls off Having said that generally if you've got a mortgage you probably don't have an awful lot of savings But then again if you're paying an interest rate of around about one or two percent Um, you know, maybe you can make savings in other areas It's a complicated subject But but ultimately the pound continues to hold up reasonably well still above its 50 day moving average and It continues to hold above this trend line support from the lows back in march So ultimately it still continues to look very resilient against the dollar and also Against the euro Continue to drift lower Finding a decent area of support And then around this 85 20 area 85 15 20 If we get a break below 85 Then you could well see Further losses back towards the lows that we saw back in august last year around about um 84 And 83 80 But looking at the way that this has been drifting over the course The highs have been getting lower And Unless we take out the 50 day moving average, which is currently acting as a fairly decent resistance level We could start to see The euro start to break lower, but it is pretty glacial in nature Euro dollar Again, it's Bit of a struggle this one Finding a little bit of support In and around this 108 20 30 area So you could see a little bit of stop loss I'm selling on a move below 108 20 also notable that these peaks here Are lower Every rally up down up down up Down so perhaps We could see further Euro losses on a break below 108 20 and back towards 107 I still think we're pretty much in a range trade for euro dollar. I really don't see it breaking out of that Anytime soon. I still think that we're potentially closer to The peak for rates The markets are currently pricing but again You know, I'm sort of placing that more On the basis of instinct than anything else if we look at dolly yen Here we go Dolly yen does appear to be starting to break down Um, we had a bearish engulfing day there We traded sideways for a week. We found decent support around about 144 We finally broken below that Um, which would suggest that perhaps we could start to see a little bit of yen strength a little bit of dollar weakness In the short to medium term on the weekly chart. It's quite interesting Be interested to see how that plays out over the course of the next few days But certainly I think there is I think we might We might have seen a short-term peak at 145 and we could be looking for a retest of 142 50 142 50 was the previous 61.8 Fibonacci retracement level of this entire down move I mean, this is one This is a mere culprit on my part on my part completely misread what dolly yen was going to do this year I thought that the japanese central bank the bank of japan Would look at tweaking its yield curve control. It doesn't appear any closer to doing that than it was Six months ago Which is surprising when you consider that core inflation is now 4.3 percent. So um You know that just goes to show that You know once once a trade idea goes wrong You don't run it all the way back and certainly I wouldn't I wouldn't have been running a short position from here so i'm still Still a little bit unsure about the the future of dolly yen I think an awful lot will depend on how close to usp rates. We are Um, certainly the rollover in dolly yen here does suggest that we are we could see a little bit of a correction back to walls 140 But we'll have to see how that plays out going forward We've also got the bank of canada next week bank of canada rate decision. Um, we did see a great hike um at the last decision And there is there is a chance we could see another one. Um this week when they When they meet on Tuesday Tuesday the 12th They tweaked their guidance at the last meeting suggesting the need for further rate hikes Which obviously gives them more flexibility when it comes to raising rates of choosing to hold them Any decision I think could well be tempered by the current business outlook Which in q2 fell to its lowest level since q3 2020 but the bank of canada has a similar sort of problem. It's a nice problem to have Um as the us it remains low Core inflation has slowed to 3.9 in may From 4.3 in april Certainly looking at this chart here We can draw a nice line Through those peaks there So we've also got canada payrolls today as well So that could also play a part Into the bank of canada Bank of canada below but certainly the move lower here Does suggest that perhaps We could be due a little bit of a pullback. We've seen a bit of canada weakness so far Since those lows back in june and could we about see a little bit of canada strength On the back of today's canada payrolls and next week's bank of canada rate decision So it's worth keeping an eye on that I'm over the course of the next week or so So that's it. We've got uk wages on the 11th Which is tuesday bank of canada on wednesday uscpi and wednesday and again wages data is going to be the key pressure point obviously that went up to 7.2 percent in april. This is for the three months to may And and it was a record high outside of the pandemic that did prompt a surge in uk two-year yields Last month, of course, we've gone an awful lot higher since then. I think it's unlikely The wage growth will slow materially In the short to medium term simply because um Workers are agitating for much higher pay rises to cope with the higher cost of living And the fact that the energy price cap Um has only just come down Um, there will be some effect in the july pay packets, but certainly no one will have felt it quite yet So it's quite likely that wage growth is likely to remain in and around seven percent Probably until the end of the year It's going to make it very difficult for the bank of england to justify halting But nonetheless, I think halts they must Simply on the basis of the fact they just don't know Or how much of a lag effect is likely to bleed through In q3 and q4 and it just makes sense to wait. Why risk crushing the economy and turning it into a dumpster fire When you've got rates already at the highest levels they've been at for 15 or 16 years It just doesn't make any sense. But who said anything about what the bank of england does make sense We've also got china trade for june coming out And we've also got the start of us bank earning season US bank earning season we got uh on friday We're going to be starting with jp morgan chase world's fargo and city group now, um had a fairly indifferent quarter um since q1 but Obviously jp morgan has been pretty much the stand out of that seen a fairly decent move saw record revenues In their q1 numbers total deposits received a lift in q1 um coming in at 2.38 trillion dollars But an awful lot of that was because of the transfer of deposits from silicon valley bank signature bank I think the big The big item on As regards to these numbers is how much of those deposits As jp morgan and all the other us banks managed to hold on to Now the concerns about the us regional banking sector have dissipated somewhat. I wouldn't say they've passed They've dissipated. I think an awful lot will depend And for all the federal reserve Decides to do with respect to future rate hikes. I think if march was a warning about what rate hikes can do Then it should be a pause for reflection when it comes to pushing your luck When it comes to doing an awful lot more q2 revenues q2 revenues for jp morgan Are expected to come in around about 39.6 billion dollars. We're likely to see a bit of a slowdown um Jp morgan co jamie diamond at the q1 numbers painted a fairly upbeat outlook saying that consumer spending remained healthy The bank did raise its full year outlook for an interesting come from 73 billion to 81 billion but Diamond did say he expects inflation to remain higher longer which could weigh on the economic outlook now inflation is coming down Could be at 3% So q2 is still likely to be a disappointing quarter Given what we've seen with respect to this price action You could see a little bit of a slowdown And a little bit of a miss and I think much will depend on obviously the guidance that these banks give us will So we've got wells fargos q2 numbers. Obviously they have a big presence in the us mortgage market What sort of demand has there been for mortgage lending at rates at current levels? And we've also got the q2 numbers from city group So expect lower revenues across the board But also pay close attention to the economic outlook I'm going to do with this jp morgan char. It's just going to draw in A nice little trend line here That's a nice little line there. So it might be worth keeping an eye on that over the course of the next few days As to whether or not we get a drop on whether or not we get a fall through that line um, we've also got numbers from berberie um They hit record highs earlier this year, but since then the luxury sector has taken a little bit of a dive over concern about the resilience of the chinese consumer And the chinese recovery And you can certainly see that in the way that this share price has reacted over the course of the past few weeks So I think the bigger question Yeah, with respect to berberie's share price is what management think about future demand When they released their four year numbers they kept the 2024 guidance unchanged Which is the time is a little surprising given the strong recovery that we've seen in the chinese consumer Of course It also suggested that management didn't have much confidence that the chinese Demandary bound was sustainable Well, that's certainly proven to be the case Q1 revenues that were expected to come in at 632 million pounds for this q1 earnings update from berberie so That's pretty much it for this week As I say, thank you very much for listening ladies and gentlemen Hope you all have a great weekend. This is michael hueson talking to you from cmc markets Thank you for listening