In European markets, equities recorded slight declines as participants assessed US labour market data and tariff developments. Eurozone retail sales for June rose by 0.3% against an anticipated 0.4% increase. Germany’s June industrial orders fell by 1.0%, differing from the expected 1.0% rise. Conversely, Germany’s July construction PMI improved to 46.3, while the UK saw a decline to 44.3, below estimates of 48.8.
The US saw a 3.1% rise in mortgage applications for the week ending 1 August, reversing a prior 3.8% drop. Concerns about US economic data emerged again, impacting market sentiment. The AUD and NZD were the strongest performers, while the USD lagged. European equities edged up slightly, with the S&P 500 futures advancing 0.2%. In the bond market, US 10-year yields increased by 3.2 basis points to 4.227%.
Gold decreased by 0.5% to $3,365.13, reversing Monday and Tuesday’s gains. WTI crude rose 1.5% to $66.13, stabilising from previous declines. Bitcoin increased by 0.5% to $114,215. With no major risk events or data releases ahead, market attention is pivoting towards the impending US CPI report next week.
Market Holding Pattern
The market is currently in a holding pattern, caught between disappointing US labor and services data and new trade frameworks. We are seeing a mixed and quiet environment, suggesting traders are hesitant to take strong positions ahead of more clarity. This lack of direction means we should be cautious about chasing small moves in the very near term.
The main event everyone is waiting for is next week’s US Consumer Price Index (CPI) report. After the annual inflation rate showed a slight easing to 3.1% in the data released for July, this upcoming report is critical to see if disinflation is continuing or stalling. Until then, expect major assets to trade in tight ranges as conviction is low.
This quiet period before the CPI data is a classic setup for buying volatility. We believe derivative traders should consider strategies like long straddles or strangles on major indices like the S&P 500 or currency pairs like EUR/USD. These positions profit from a large price move in either direction, which is a distinct possibility once the inflation numbers are released.
European Economic Concerns
The economic data coming out of Europe is a major warning sign for us. With German industrial orders falling 1.0% against expectations of a 1.0% rise and UK construction PMI dropping sharply, the outlook appears negative. This points towards potential downside for European equities and weakness in the Euro and British Pound.
We saw a similar dynamic play out in the 2012-2014 period, where persistently weak industrial and manufacturing data from the continent led to a significant underperformance of the Euro. The current situation with German industry, Europe’s traditional engine, is flashing red again. Therefore, looking at put options on the DAX index or shorting EUR/USD could be a strategic response.
The US dollar is in a complicated spot, lagging for now because of our own weak data. This is why we see commodity currencies like the Australian and New Zealand dollars showing strength. This breaks from the typical risk-off pattern where the dollar would normally catch a bid on global growth fears.
In commodities, the rise in US 10-year yields to 4.227% is likely weighing more on gold than the slightly weaker dollar is helping it. The bounce in oil appears technical for now, finding support near its 100-day moving average. We would not read too much into these moves until the economic picture becomes clearer next week.
