Eurozone inflation comes inline at 0.2% in July

The Day So Far

Early bounce this morning in equity markets after a stable Asian session, in particular the Chinese Yuan, which has settled down since depreciating 4% versus the dollar this week. Many analysts are calling for yuan to continue to depreciate this year as the Chinese search for any way to aid their ailing economy and conform to the IMF’s criteria for joining the SDR basket of major currencies. However, we have since headed gradually lower throughout the morning, the Dax breaking the crucial 11,000 handle and S&P testing yesterday’s lows, and look set for more risk off this afternoon. There are a myriad of macro worries for investors as we enter what has historically is the weakest period for equities. Firstly, emerging markets, for much of the past decade the engine of growth for the global economy, have really weakened in recent months as demand for commodities has slumped, particularly Chinese demand. Europe, although improving recently from a low base, is unlikely to provide the ballast for a big pickup in global growth. Secondly, there are real concerns that, while US economic data has been underwhelming this year (the Atlanta Fed USQ3 GDP tracking estimate showing just 0.7% growth), the fear is that the Fed will have to tighten this year almost irrespective of the state of the economy simply because it must retain some ammunition if/when the next recession hits. This leaves US equities particularly vulnerable in the wake of an unconvincing earnings season, lacking the boost of QE that Japanese and European stocks can count on.

The Afternoon View

Unsurprisingly, we have a bearish bias for equities this afternoon, I still think the S&P needs to reach 2035 before a meaningful bounce can occur, however, in light of all the worries we have discussed, new highs for this year are very unlikely. The euro has shown strong resilience even shedding its usual correlation with crude, and with the US dollar failing to reach the symbolic 100 level, perhaps ‘King’ dollar is in danger of unravelling , even though it is such a popular theme among many investors. Crude has to be a short having, having made new 6 and a half year lows, maybe opening up for a shock drop to $40.