Greek GDP rises 0.8%in 2nd quarter

The Day So Far

European equities have followed on from the extraordinary recovery in US equities in the yesterday’s close. The S&P, seemingly without an apparent catalyst, rallied more than 30 points from the European close lows to trade above 2082.50 resistance. This could be due to relief that China’s actions have re-ignited the currency ‘wars’ between the largest economies, leading to the Fed to respond to China’s move to devalue the yuan by not raising rates in September. A more dovish Fed would be welcomed by equity markets, as US stocks have under performed this year partly as a consequence of fears over the timing of possible hikes. The dollar was broadly weaker against major currencies yesterday, the euro eventually retracing after hitting significant resistance at 1.12 handle.

The host of European inflation data released this morning was broadly positive, with Spain and Germany staying out of deflationary territory and only France disappointing, falling slightly from 0.3% in June to 0.2% in July. This has capped the upside in the bund following the strong bearish reversal in fixed income yesterday as US equities recovered.

WTI has remained in a tight range this morning after an encouraging DoE release yesterday, finding support around the $43 mark. There was another reduction in inventories, albeit less than the market was expecting, but more importantly, US production fell to a three month low, suggesting that the fall is starting to pressure shale drillers. Goldman Sachs recently reported that, although the average cost of production US shale oil plays had come down to around $60 as producers frantically cut costs, it is still almost 50% above where crude is trading now so a bounce is due. One suspects that a final test of the 2015 low around $42 is on the cards before a sustained rally can commence.

The Afternoon View

The fallout from the PCOB’s move to devalue the yuan has abated for now, and the strong bullish reversal yesterday in the S&P leaves it nicely poised to test the top of this infuriatingly tight trend this year. With China quieter, the focus should now shift back to the US economic data, and few data releases are as eagerly anticipated as this afternoon’s retail sales. Despite the fall in crude prices, leading to lower prices at the pump, consumption has remained one of the most disappointing aspects of the US economic releases this year. This is as much a function of scant wage inflation in most of the low-skilled economy as a lack of confidence in the economic recovery, nonetheless hopes for this release are for an increase in retail sales m/m of 0.60%, a big improvement on the previous month’s -0.30%. An inline/stronger number and T notes could continue to sell off, however given how weak the trend has been this year I suspect more disappointment here. That would enable the dollar to challenge the 15665 resistance and the eur/usd could test the 1.12 once more.