Much like the selloff in gold bullion that commenced earlier in the week, equities have now found themselves under pressure as a series of weak earnings reports has global capital markets in a decidedly risk off mood. Starting in Asia, Chinese consumer confidence hit a 19 month low while business sentiment slid to a six year low as the mainland economy continues to show signs of fundamental weakness. While it has been suggested that these data points are in a large part a response to the dramatic sell off in Chinese markets in June, it is more likely that they are a sign of broader weakness in the overall economy as China manages its transition from a middle income to an advanced economy. This is further underscored by the fact that only about 15% of household financial assets are held in equities in China, meaning that the same transmission mechanisms that exist between financial markets and the real economy in advanced countries simply do not exist to the same extent in China. Outside of China, the yen and aussie are both trading on a stronger footing as the Reserve Bank of Australia head delivered a relatively sanguine outlook on the risks facing the Australian economy while the yen is benefiting from its status as a safe haven currency while a risk off stance permeates global financial markets. Additionally, something to look out for on the horizon is a rate policy decision later today in New Zealand, with market participants expecting another rate cut, already today the kiwi dollar has taken a knock.
Moving on to Europe, todays shift in sentiment becomes clearer as European equities are broadly lower while market participants digest the disappointing financial results effecting tech giants IBM, Microsoft and Apple. Notably, the sterling has recommenced its upward stride after members of the Bank of England’s monetary policy committee opted not raise rates at this juncture but did point out that inflation in the UK may hit its 2% target earlier than expected and as a consequence the BoE may shift towards a more restrictive monetary stance as early as the end of this year. Outside the UK, the euro is also posting gains as its status as a safe haven currency has drawn capital from more risky asset classes.
Moving stateside, S&P futures indicate that North American markets are set to open lower with the risk off sentiment resulting from yesterday’s poor earnings reports largely to blame. Driven in part by this shift in mood, the USD is on the retreat with it losing ground versus the yen, euro, loonie and aussie. With little in the way of economic data to drive market activity other than housing and crude oil inventories we can expect trading in the North American session to largely be driven by sentiment, which today does not bode well for equities nor commodities.
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