Markets relief as China data comes in as expected

With another record close in the US last week, European markets look set to open higher this morning after the release of the latest Chinese economic data showed that the world’s second biggest economy is more or less growing in line with lowered market expectations, though there does appear to some growing signs of stress.

These numbers appear to have been greeted with some relief after comments on Friday by the Chinese finance minister that suggested that we could well see a much weaker number.

In any event we did see a weaker number from Q1’s 7.7% with Q2 GDP coming in at 7.5%, with industrial production in particular bearing out those weaker PMI numbers seen in previous months, coming in below expectations of 9.1% at 8.9%.

On the plus side retail sales for June increased to 13.3% from 12.9%, showing that domestic consumption is holding up well despite fears of slightly tighter credit conditions.

Some would argue that Friday’s downgrade of France by Fitch to AA+ with a stable outlook was long overdue given that the French owned agency was the last of the big agencies to have the country on that particular standard.

Irrespective of the rights and wrongs of whether France deserves the rating the fact remains it no longer has the triple “A” with any ratings agency, and as such can expect to see further downgrades of its banks, as the sovereign’s credit worthiness is cut.

Fitch cited high unemployment and budget deficits as its reason for cutting the rating, while at the weekend the French President pledged to spend less in 2014 than 2013.

With Q2 earnings season only just starting in the US last week we saw the S&P500 post another record close on Friday as investors bet on the Federal Reserve keeping the taper option off the table for the time being.

How long that perception remains is an open question but continued improvement in US economic data is likely to increase the divisions on an already divided FOMC committee. While some would have you believe that is healthy, it also serves to heighten the uncertainty in the markets as the sands of opinion can shift very quickly.

Today’s retail sales data for June could well feed into the tapering debate if we get an improvement in line with recent consumer confidence numbers which have been much better than expected. Expectations are for a rise to 0.7% from 0.6% in May, while Empire manufacturing is expected to decline slightly from June’s 7.84 reading to a more modest 5 for July.

EURUSD – the pullback from the sharp move to 1.3200 at the end of last week managed to hold above the 1.3000 level. Given the bullish daily candle seen last week the bias remains for a move higher towards the 1.3230 level initially, and even 1.3400. Support should come in around Friday’s lows at 1.3000.
Only a break below 1.2750 argues for a move towards the 1.2680 level which is 61.8% retracement of the entire up move from 1.2045 lows in July last year to the highs this year at 1.3710.

GBPUSD – the twin lows at 1.4830 remain the key barrier to further losses towards 1.4230 and the May 2010 lows. The daily bullish engulfing candle seen last week suggests the risk for a move back towards the 1.5320 area. Pullbacks are likely to find support at the 1.5030 level, which if broken undermines the potential for any rebound, and argues for a retest of the key support at 1.4830.

EURGBP – the euro continues to find support at higher levels having established itself above 0.8620; however it is finding it difficult just below 0.8700. A move below the 0.8620 area argues for a retest of the 0.8580 area. We need a break below the 0.8580 level to retarget a move back towards the 0.8520 area.

USDJPY - the bias remains towards the downside with support at the base of the Ichimoku cloud at 98.15, preventing a deeper correction towards the 96.50 area. We need to get back above the 100 level to retarget a test back toward 101.50. Only above 101.50 changes the outlook and retargets the highs this year at 103.75 and then 105.80.

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