The S&P closed at an all-time high in the previous session and has opened on the front foot in early trading today, as investors remain optimistic about a Fed rate cut at the end of the month. Last week’s strong jobs report plus higher than expected core inflation and a surprise move higher in producer prices have failed to deter the markets from the expectation of a 25 basis points, if not a 50 basis points cut on 31st July. Instead traders remain cautiously optimistic that the Fed, as indicated by Fed Chair Jay Powell in his testimony before Congress, will cut rates. The prospect of easier monetary policy and resultant lower borrowing costs has lifted the S&P through 3000 to an all-time high.
Earnings & China GDP
Whether the S&P will be able to maintain this level come next week is dubious particularly given that the US – Sino trade war could be back in focus. The week kicks off with Chinese GDP figures. The expectation is that the Chinese economy grew just 6.2% annually in the second quarter as the ongoing trade dispute and slowing global demand hit growth. A reading at this level would mark the worst rate of growth in three decades, a fact which would hit risk sentiment across the globe.
US earning season also kicks off next week with big names, Goldman Sachs, JP Morgan and Netflix all updating the markets. The upcoming earning season is shaping up to be a weak one. Of the 114 companies that have issued guidance for the period, 77% of them have issued negative forecasts. A weak earning season amid the ongoing trade dispute could knock investors’ appetite for risk, regardless of whether the Fed is looking to cut or not.
FTSE Lacks Drive Amid Stronger Pound
Given that the S&P’s all-time high in the previous session and the fact that it has opened on the front foot today, the FTSE is looking a little flat. The UK index is toying with the idea of snapping a six-session losing streak, brought on by the rallying pound.
The pound is heading towards its first weekly gain versus the dollar in three weeks. There is a chance that the pound will also snap a 9 week loosing streak versus the euro as it attempts to extend today’s gains. With the Fed and the ECB sounding increasingly dovish, the BoE stands out as an anomaly. Still unprepared to admit defeat the BoE continues to insist that a rate rise could be required should the UK have an orderly Brexit. The big problem with this picture is that Boris Johnson looks set to win the Conservative leadership race and he continues to insist that Brexit will happen 31st October, with or without a deal. This makes a disorderly Brexit more likely. Combine that with the weakening data and a rate hike looks out of the question.
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