Europe catches tail of U.S. bounce

Summary

U.S. stock futures tick into the red as the open approaches, the usual pattern, of late, before buyers swoop at Wall Street’s open.

The West and The Rest

Another day, another multi-month low for Asia-Pacific shares. Europe hasn't exactly blazed a trail this year either, but protectionism isn't taxing the region's equity markets as severely. London's FTSE, for instance, is 5% off side in 2018, still better than, say MSCI's principle Far East gauge, which has shed 11%. Last year’s model global growth is fracturing, but mostly outside of Europe and North America. In all probability, this is unsustainable. But the extent of lag investors expect before EU/U.S. returns erode is key. With more U.S. tax cuts on the cards, another quarter of muscular earnings highly probable, and continuing real-economy goodies, little wonder last week’s dip and this week’s worrying start are being bought on Wall Street, whilst Europe attempts to follow. That theme’s unlikely to change this year.

FTSE shows tougher metals

The FTSE is at least taking a break from emerging market-related drag on Wednesday. It has shrugged off the first eye-catching yuan fall for weeks that earlier handed Asia Pacific indices another leg lower. London’s biggest miners—key FTSE link to EM—are holding up well, on a wash of brokerage upgrades. The sight of sterling back at $1.30, after a look at $1.25 just over a week ago, is worrying shareholders in heavyweight consumer and property shares—see BT, Vodafone, Unilever and others. Dominant banks—Lloyds for one—also give back counter-market gains from earlier in the week when relief wafted over from Italy as the government signalled it wouldn’t upset the fiscal apple cart. FTSE lenders probably won’t see much advantage from Thursday’s Bank and ECB statements either. The central banks will struggle to provide further fuel, on their own, for more yield, sterling and euro elevation after recent advances. Some key consumer names are on the right foot—easyJet, Burberry, the supermarket. So perhaps the reverse correlation with sterling really is losing sway. FTSE joined its mid-cap cousin in the green at mid-session and holds there, despite Wall Street’s slight wobble. Consensus for Europe and the U.S. to extend recovery from Friday/Monday is building.

Tory talk pressures sterling

Sterling’s strengthening resolve on Brexit hopes and perhaps expectations of toughening Bank of England signals (Thursday) are being tested by Conservative Party rebels. They’re stepping up a campaign to get dissatisfaction with Theresa May higher up the news agenda. Given so much dissent in their ranks and the questionable logic of a challenge right now, markets are discounting the possibility that their dissatisfaction will amount to much, before March 2019. It makes sense that this sort of thing is bubbling up more frequently though. For sterling, the talk translates to a challenge on Tuesday’s $1.2967 low. Sellers appear to fear losing their long-held initiative. If cable steadies, even after breaking below this month’s rising wedge, bears will retreat further, and sterling will solidify hold on $1.30.

Watch core U.S. PPI

U.S. producer price inflation data (13.30 BST) fills the gap before the week’s main Bank of England/ECB events on Thursday. The higher end of forecasts over the last few years has tracked outcomes better than consensus and the low-noise ex-Food/Energy print is the one to watch. The upper end of Reuters’ forecast range sees growth of 0.3% compared to consensus at 0.2% and July’s 0.1% rise. The annualised core reading is seen progressing at the same 2.7% rate as the month before. We suspect FX participants are preparing for another charge by the dollar, possibly triggered by this afternoon’s data. The Dollar Index has risen for seven of the last ten sessions.