UK construction output contracts 1% in July

The Day So Far

The UK construction data, released this morning, showed a contraction of 1% in July. This comes a day after the hawkish MPC meeting minutes, which suggested the committee was relatively unconcerned about the China slowdown and global volatility and is leading to a bout of sterling weakness this morning, giving back some of yesterday’s gains as the currency pairs drifts back down towards the 1.54 handle. This was also the pre-MPC high. Elsewhere, equities have started the session on the back foot, again lacking convection to drive higher or much lower before the Fed next week; it would be a surprise if the S&P broke the 1900 handle before next Thursday. The high of the range is capped nicely at 1983, the double top from the 28th August and Wednesday’s high.

Crude enjoyed a strong bounce yesterday as the DoE inventory numbers showed another large build but this was coupled with the US crude output figures which fell again by 90,000 barrels a day. US oil production has now fallen almost 500,000 barrels a day since hitting a multi-decade high in April this year. In the short-term supply bottlenecks are likely to cap the upside but the ongoing fall in US production should start to affect inventory levels in future, although perhaps US production needs to drop below 9 million barrels a day before prices can really turn around. Goldman Sachs have hit the headlines today with a punchy low $20s call for crude if supply refuses to fall.

The Afternoon View

We are sticking with our bearish bias in equities going into the weekend. As discussed previously, this post-Labour Day week has been very tricky to trade, with the S&P essentially flat on the week. However, a short bias is our preferred strategy going into the weekend and just four trading days before the FOMC. We are long euro as that has been a strong risk off correlation in recent sessions, as the euro rise has had a negative impact on European equities in particular, but sentiment in general. The other part of the risk-off equation is crude, and there we also maintain our short bias. $44 has been a decent floor in prices this month.