Mostly calm ahead of GDP

Summary

Real or not, likely to be sustained or not, signs that the U.S.’s trade stance might not be all one way after all are keeping markets calm and positive.

Amazon beats hard

Amazon’s momentous trouncing of net income forecasts and expected third quarter guidance also go a long way to keep growth-seeking investors in the market, after Facebook’s warning that it faces years of weaker revenues. Amazon’s beat props Nasdaq futures and points to a second session of gains for that index later, by way of recovery from the sharp losses in step with the collapse of Facebook share. Dow and S&P contracts also have a positive tint.

Europe needs catalysts

In Europe the stream of earnings is picking up, with a set of pleasing if not spectacular reports on Friday. The car sector remains in sharp focus as an epicentre of the trade conflict on this side of the Atlantic and after the apparent stay of execution due to EU-U.S. rapprochement. With Britain’s FTSE, Germany’s DAX, Italy’s MIB all just slightly higher and Paris’s CAC slightly soft, the atmosphere is constructive for further potential strength though lacks catalysts. A retracement of the week’s upswing by oil also drags stocks. Brent looks set to gain for a first week in four. U.S. WTI eyes a fourth-straight weekly fall. With the oil price outlook persistently uncertain even as inventories fall and geopolitical disruption crimps supply, it’s a key sticking point for shares to fully exploit improved sentiment.

Overtures to China

There’s also uncertainty on China’s reaction to the surprise tentative U.S.-EU agreement. A lack of resolution between the States and China also caps risk-taking. U.S. Treasury Secretary Mnuchin stated overnight that Washington remains willing to reopen discussions if Beijing makes “serious changes”. It may not be unconnected that the U.S. Senate on Thursday quietly lifted tariffs on thousands of goods made in China. The vote, with no debate was unanimous. The stated rationale was that the categories of goods, including some chemicals and items like toasters, are largely not manufactured in the States anymore. Tariffs on them are therefore more of a consumption tax. However, the move could also be read as a small sop for Chinese manufacturers, coinciding with Mnuchin opening a potential avenue for reconciliation.

Dollar and yen rise ahead of GDP

The dollar’s rebound at the end of week ahead of possible blow-out second quarter growth data could put an end to conciliatory White House gestures, at least from President Donald Trump, who earlier in the week was decrying dollar strength. On Friday, a key impetus of greenback strength was a special Bank of Japan operation aimed at cooling the yen further on top the central bank’s efforts to walk-back a hint that it was considering quantitative easing.  Ironically, the yen is among key currencies maintaining a patina of strength against the dollar as I write. It’s unclear whether residual safety seeking is the main factor or if participants need even more convincing the BOJ will hold its QQE ground. Both apply.

U.S. Q2 growth to hit sterling, euro, aid shares

Against the dollar, sterling is hardest hit structurally as range extension below $1.31 sets in. EUR/USD, exposed as still fragile by a mere nudge from ECB commentary on Thursday, has yet to make further attempts at highs for the week between $1.174-$1.1758. Both euro and sterling look vulnerable if a GDP surprise strains to the upside, like numerous data points over the last few months. The advance reading is forecast to show robust growth of 4%. Core personal consumption expenditure (PCE), forecast to tick back to 2.2% growth from 2.3%, also has the capacity to stimulate a lengthened dollar run.  Recent misgivings about yield curve flattening could be aired again if advance GDP prints above expectations. Still, the highest short-term yields in a decade were seen this week and they did not preclude strong stock market gains. Furthermore, investors’ take on rising rate expectations is less anxious than in the spring. If we’re correct, concomitant pressure on riskier assets, like shares, will alleviate further, and not exclusively in the Eurozone.