European markets head lower after higher-than-expected UK CPI

European markets are continuing their downbeat tone this morning, with indices throughout the continent trading in the red. Today's big-ticket news out of Europe came from the UK with inflation coming in higher than expected. Despite headline inflation remaining at 2%, underlying pressures remained stubbornly high, with core (3.5%) and services (5.7%) inflation showing no signs of improvement. Those wondering what the cause could be for this month’s particularly high 3.3% bump in accommodation services will look in the direction of Taylor Swift, creating a curious situation where the popstar’s tour could cause the Bank of England to hold off on cutting rates next month. The pricing for an August rate cut has significantly eased, with markets now looking towards September as the month that will see the BoE, ECB, and FOMC ease.

Traders have been given a fresh insight into the kind of headlines that will likely dominate a second term for Donald Trump, with the current presidential frontrunner ramping up the rhetoric around a potential trade war with China. Trump's America first approach would include rampant tariffs on imported goods, while domestic businesses enjoy a corporation tax cut to as low as 15%. However, one of the biggest shifts would be the prospect of an ambivalent US with regards to the protection of Ukraine and Taiwan, standing in stark contrast to the interests of NATO. While Biden has sought to front-load funding agreements to ensure that US support does not immediately disappear in the event of a Trump Presidency, Hungarian leader Victor Orban recently stated that Trump has plans to draw a line under the conflict. Given the inflationary pressures that have emerged as a result of the Ukraine-Russia war, there is a strong chance that markets treat any such peace agreement as a positive given the potential disinflation if Russian goods flow freely once again.

Looking ahead, traders are expecting a negative open in the US, with big tech once again in the spotlight after a period of redistribution that has seen the likes of the Russell 2000 and Dow outperform the Nasdaq and S&P 500. Coming into an earnings season that once again raises questions over the viability of current MAG7 valuations, traders are increasingly seeking value for some of the more cyclical stocks. That broadening of the stock market is a sign of strength, with traders increasingly optimistic over the direction of the economy in the face of a potential September rate cut. Meanwhile, that redistribution of funds away from the MAG7 names could be short-lived if we see another stellar earnings season from Nvidia and co.