 Good morning, welcome to CMC Markets on Friday the 30th of July and this quick look at the week ahead beginning the 2nd of August with me Michael Hueson. Before we get started let's just have a quick look back at the events of the past few days and after a poor start to the week Markets in Europe managed to pull off their lows as a consequence of two days of fairly strong company updates from the likes of UK banks, oil companies and obviously some very decent numbers from the US tech giants and these these strong earnings updates helped push the stock 600, the FTSE 250, the S&P 500, the Dow Jones and the NASDAQ to do record highs. However there does appear to be a little bit of end of week weakness starting to creep in and I think a large I think a large part of that is over concern about where equity markets are likely to go to next because I think when you literally look at this week's earnings announcements good as they have been I think one of the questions is after a fairly decent first half will the second half of the year be equally as positive? Now will European markets be able to sustain a six successive monthly gain and at the moment the jury is a little bit out on that if we say for example look at the FTSE 100 we can see that we are starting to see a little bit of weakness today after the decent gains from Wednesday and Thursday and if we look at the monthly chart there are signs that we're starting to top out a little bit with fairly decent supported around about 6,800 whereas we're really struggling to crack above 7150 and 7170 and if we look at say for example similar moves on the German DAX it's a similar sort of story when it comes to a little bit of a topping out pattern this is the daily chart we look at the weekly chart or the monthly chart rather and again we've made an incremental new high but it looks as if we could well finish the month lower and I think that really is the biggest concern going forward that momentum is starting to run out of steam and we could be on the cusp of potentially a little bit of a move towards the downside alternatively we could just continue this sideways range that we've been in over the course of the past few weeks more worryingly the Nikkei is showing signs of rolling over and I think that more than anything is a bigger concern the fact that since February the highs have been getting lower and the lows have started to get a little bit the reaction of the lows hasn't been anywhere near as positive I think the big level on the on the Nikkei is around about 27,000, 27,100 that's going to be I think a very key level over the course of the next few days if we break below that then we could well see further weakness in the Nikkei 225 and I think a lot will depend on the after effects of this week's events in China markets in Europe I think I've opened I've opened obviously opened lower today seen a little bit of end of week weakness end of month weakness there was some talk that Chinese regulators were softening their positioning on regulation over concerns about the extent of the recent sell-off that we've seen in Chinese markets and if that is their intention in softening the position softening the rhetoric doesn't appear to be working the reality is I think the recent crackdown by China has let the genie out of the bottle and confidence appears to have shifted so I think people will be reluctant to put money back into Chinese markets or those stocks that are particularly exposed to Chinese regulatory scrutiny without China putting a little bit of meat on the bones of what they were outlining or what they were indicating in recent commentary the damage to confidence may be an awful lot harder to repair given recent events so we're coming into August against a backdrop of a little bit of uncertainty about the regulatory framework in China obviously the really bumper earnings announcements that we've seen from the likes of Microsoft Apple and Alphabet were very very positive but it's prompted the question how does how do they improve on that and obviously Amazon's numbers came in below expectations even so they still managed to post three successive quarters of revenues well in excess of a hundred billion dollars so I suppose it really depends on your perspective I think when we're talking about tops and bottoms highs and lows and what have you let's just look at the price action and the price action is telling me that we're in a range if we basically knock that trend line out there the bottom of that range for the FTSE 100 is 6800 fairly decent support the top of that range is anywhere between 7150 and 7170 so at the moment we're still in a bit of a range the S&P 500 is still very much in its uptrend even if there is a perception that we could roll back down to this line here the highs are still getting higher the lows are still getting higher so US markets still remain in an uptrend so at the moment there are no signs that the bubble as it is if you whatever however you want to describe it is starting to look if it's going to pop so for the time being it's pretty much as you were continue to play the range now obviously if we look at the NASDAQ we've seen a very sharp reversal there and there is a concern that the extent of that fall we really need to see the NASDAQ start to make new highs so the key support for me on the NASDAQ is this low here it's around about 14780 if we break below that then obviously that then opens up this low down here let's not forget it's basically the trend is your friend so when we're following and looking at what markets are looking to do basically just watch the underlying trend so there's my trend line for the NASDAQ we break below that line then we could we'll see a sharper correction towards the downside and that is important in technical analysis when all else fails stick with the technicals because they are the best arbiter I think in terms of market direction now we've seen a big week for dollar weakness and that's significant as we look ahead towards the payroll's report which is coming up on the 6th of August and that's going to be my main focus I think over the course of the next few days it's the June payroll's report July payroll's report particularly given the fact the US second quarter GDP came in 2 percent below expectations you know it came in at six and a half percent now that's not too shabby under normal circumstances unfortunately we're not living in normal circumstances there's a pandemic raging and the expectation was we'd get an eight and a half percent expansion moreover weekly jobless claims aren't coming down anywhere near as fast as you'd like them to come down they're still anchoring around 400 000 when you've got nine million vacancies in the US economy you've got to ask yourself why those vacancies aren't getting filled even and I think that's one of the key concerns that the Federal Reserve has with respect to the US labor market in which is causing them to be very very dovish when it comes to the recent rise in CPI, PPI and PCE inflation repressures now the June jobs report turned out to be a much better report than expected on the headline number and that's what I mean the headline number was much better 850 000 jobs it was a decent improvement but it didn't tell us too much about the overall state of the US labor market in terms of how quickly those US workers who've dropped out of the workforce since February last year are likely to come back so what do I mean by that well the US participation rate remained unchanged at 61.6 percent that's still almost 2 percent below where it was pre-pandemic 63.4 percent so when you translate that into real numbers that's seven million people who are no longer in the labor force looking for work the participation rate and you know when are they going to come back and I think that's the big unknown we know that New York Fed President John Williams is one member concerned about the lackluster rebound in the participation rate it has rebounded from the lows of the pandemic when it was around about 60.3 percent 61.6 but it still remains below the levels that we saw in February 2020 so I think in an effort to prompt more workers back into the workforce some US states are phasing out already some of the emergency benefits brought in as a result of the pandemic and in an attempt to force more people back to work now all of these benefits expire in September so we should get a better indication there hopefully as Delta variant cases start to roll over and vaccine rates increase but at the moment the US is experiencing a pandemic of the unvaccinated and that's holding back economic activity so I think the big question is how many of these seven million have retired early and no longer intend to come back how many have set up their own businesses and how many intend to come back to the workforce and quite simply it's too early to know the answer to that question and I think that really reflects why the Federal Reserve was as non-committal this week when it came to any type of discussion about a tapering debate and in terms of the amount of tapering because 120 billion dollars a month is quite a lot but even if you reduce it by 20 billion it sends a signal that the process is starting but they can reduce it by 10 billion a month and it can still go on the extra asset purchases for another 12 months after that so I think the tapering debate is a little bit of a red herring more than anything else and I think one of the things that Powell said this week was quite interesting when he said the Fed is a ways away from raising interest rates which you know sort of flies in the face of what Bostick and Bullard are saying they expect to see a rate rise by the end of the next year we'll just have to wait and see we just don't know and that will explain why the dollar has come off as much as it has over the course of the past week and that's simply on the basis that weaker economic data GDP weaker jobless claims slightly higher and it's pushed back to tapering but tapering discussion potentially towards the end of this year probably at the earliest and as a result the dollar is weaker as a consequence of that and that's why US Treasury yields are now 125 and well below 1.5% and we can look at the trend here you know it's quite clear the US 10 year yield is around about 124 down two basis points on the day you've also got as well above the lows of 1260 on the 20th of July but the direction of travel here is quite clear lower highs lower lows the trend for US yields on the long end appears to be lower and that's probably not going to be so great for US investment banks returns in terms of the yield curve the yield curve is starting to flatten again so that is going to be a worry certainly I think in terms of bank earnings more broadly we've also got a Bank of England meeting next week I'm not really expecting too much from that despite the recent hawkishness from Deputy Governor Dave Ramston when he became one of the first NPC members to break ranks on a pairing bank a pairing back even of monetary stimulus I think with the departure of Andy Haldane as chief economist there was an expectation that the NPC would dissolve into groupthink basically just sign off the status quo in terms of monetary policy until the end of the year now we've got two Bank of England policymakers breaking ranks in the last few weeks to question the merits of current policy by articulating the prospect that the asset purchase program might need to be reined in now perhaps we shouldn't have been too surprised by Dave Ramston's being the first to break ranks because his comments about negative rates a year ago suggested he was less than keen on the prospect I'll give you a clue he's not the only one but I think his comments that the case for considering the pairing back stimulus measures was noteworthy it acknowledges the vaccine program has potentially changed the game and it was also notable that he was joined by external NPC member Michael Saunders and expressing rising concern at how transitory or otherwise inflation levels were likely to be now infection rates are starting to fall in the UK at the moment and obviously that is encouraging hospitalizations are continuing to age a little bit higher so there appears to be a little bit of a disconnect there so I think the big question I think as we look ahead towards the Bank of England policy decision on Thursday the 5th of August is while there's little likelihood of a change in policy at this meeting it will be noteworthy to see if there is any dissent on the pace of the bond buying program and where the bank the bank will look at slowing the pace of it nonetheless the big level on cable is this 140 level here I've outlined it with this red line all the way across the top here so if we are to trade higher on cable then we need to break above 140 20 in the short to medium term we certainly have seen some sterling strength when it comes to euro sterling but once again we're finding decent buying in and around that 85 area and then just below that we've got support of 8480 so we're range trading on euro sterling in the same way that we've range trading on the FTSE 100 the big the big support is around about 8470 interim at 85 and then we've got resistance at 8640 and 8730 so you really pays your money and you take your choice when it comes to euro sterling in terms of other economic data we do have services PMIs for July the latest flash PMIs from both the UK and the US who saw surprise falls in both during July and I think the main reason for the UK services activity decline to 57.8 was a direct consequence of the so-called pandemic I hate that expression but I mean I suppose it really just quite elegant elegantly disguised it describes the problem that businesses are having with respect to economic activity self-isolating due to being pinged by the NHS track and trace that business optimism about the economy is also declining as a consequence of that having said that pandemic restrictions will be will be eased on the 16th of august so that fully vaccinated people won't have to isolate if they are pinged by the track and trace app sadly there's still at least another two to three weeks to go before that comes into effect so those are the key economic indicators that we've got next week in terms of the earnings announcements we've got a fairly decent we've got a we've got a report from HSBC first half numbers from HSBC following on from the really good numbers that we saw from Barclays Lloyds and Nat West seen a resumption of dividend payments and buybacks from Nat West and Lloyds and what we've also seen is all three banks recycle reserves from non-performing loans back into the profits and that is very very welcome because it suggests that they're much more optimistic about the outlook for the UK economy going forward in terms of share price performance there hasn't been much to cheer about for HSBC shareholders as you can see from this graph here we've broken below the 200-day moving average we're in a downtrend we found a little bit of support around about 390 but to be quite honest the rebound looks fairly feeble so i think this week's first half numbers should be fairly indicative as to whether or not we've seen a proportionate pickup in its UK business i think we should have it fairly you know there was a fairly decent there was a fairly decent amount of profits generated in Q1 for the UK business of one billion dollars and certainly Barclays Lloyds and Nat West have shown some fairly decent returns from the UK businesses so you would expect the UK do the same in the first quarter it reported income of 5.8 billion dollars a decent increase on the same quarter last year most of the profits came from the bank's Asia business so given the turmoil that we've seen in Asia over the course of the past quarter in terms of the stock markets we'll be interested to see whether or not that will be sustained in Q1 the bank recycled 400 million dollars of last year's 8.8 billion dollars of loan loss provisions back onto the balance sheet so i'll be looking for evidence as to whether or not they feel confident enough to add to that recycling of funds and the global banking and markets division also had a decent Q1 though given the poor performance from US banks i wouldn't expect to see too much in the way of ripping up trees as a consequence of Q2 so i think HSBC has a very big bar to get over to break the downtrend that it's been in over the course of the past few weeks since those peaks at the end of May beginning of June which brings us on to BP Royal Dutch Shell it's posted some fairly good numbers last week if we look at BP we can see BP shares have been remarkably unimpressive in terms of their overall performance since June you would think that with oil prices up near three year highs that BP share price would reflect that it hasn't um it's out look for a cash flow surplus is based on an oil price of 45 dollars a barrel and yet we hear yet here we are at 75 dollars a barrel i think there's an awful lot of investor skepticism on the part of investors about BP's going green plan if we look at in terms of profits BP reported underlying replacement cost profit of 2.6 billion dollars in Q1 best performance since 2019 better refining margins higher oil prices company says it's looking to resume buybacks obviously shell announced a 2 billion dollar buyback last week BP did say that cash flow in the second quarter would be impacted by its 1.2 billion dollar Gulf of Mexico payment so that could impact its numbers for Q2 it could be it could be that shareholders aren't convinced that the plans for a 40% reduction in oil and gas production is anyway practical or achievable without hammering its margins and i think that's maybe why we've seen the decline in the share price since June transition towards green energy is likely to be expensive we know that having invested into wind power leases in the rfc it's clear what the direction of travel is while light source is also delivering on its projects for now the performance of the share price would suggest that the jury remains out so i think as the numbers when the numbers come out on Tuesday it'll be interesting to know whether or not we see further declines towards the lows that we saw in the middle of July it's certainly worth keeping an eye out for going to finish up with Rolls Royce it's been absolutely hammered by the pandemic given the fact that it relies on servicing airline jet engines for about 50% of its revenue and as planes haven't been flying hasn't been getting any revenue has been has seen a little bit of a rebound off its july lows um been a fairly uneventful three months for the Rolls Royce share price again much will depend on whether or not the aviation sector is able to get off the ground um in terms of resuming some level of normal flights now with British Airways already saying it's only going to be planning um around about 40% of capacity transatlantic over the course of the next over the rest of the year that does not seem likely and Rolls Royce is expecting engine flying hours for this year to come in around about 55% level from six months ago that number is starting to look ever more doubtful as we head in to year end so I think for me when you've got easy jet saying that they only saw Q3 flying 17% of their overall capacity I think we do need to be prepared potentially for a guidance uh change um at um this week's numbers for Rolls Royce but have a cook you know keep keep a close eye on the lows that we've seen back in January and back in July personally I think we're probably likely to continue to stay in the range that we've been in over the course of the past few months other items to keep an eye out for this week are Uber's latest numbers potentially AMC Entertainment Q2 numbers depending on who you believe their numbers could be out on the fourth of August fifth of August or the sixth of August um at the moment there's no potentially confirmed date for that but they are due we've got Games Maker Activision Blizzard they've had a fairly good year on the back of the fact that people have been staying home buying games and playing games on their consoles we've got Uber and we've got Beyond Meat so that's it for this week once again thank you very much for listening to my ramblings this week speak to you all the same time same place next week and don't forget to tune in to non-farm payrolls on Friday the 6th of August at 1 15 where I'll be covering numbers live as they hit the tape thank you very much