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Evidence of slowing activity in China’s service sector and weak commodity prices weighed on Asian shares on Thursday. The financial sector led the declines with shares of HSBC coming off after its earnings report earlier in the week. The losses came despite ongoing weakness in the US dollar as President Trump signed a fresh sanctions bill against Russia. On Wall Street the Dow Jones closed above 22k for the first time to see its 6th day of record closes.
China’s Caixin services PMI slipped slightly from 51.9 to 51.5 in July. Government stimulus is leaning China’s economy back towards its traditional reliance on manufacturing and State-owned industries and away from independent services.
European shares look set for a mostly lower start as corporate earnings including Itlian bank Unicredit and German carmaker BMW come in thick and fast. A weak lead from Asia, another slump in oil prices and a strong Sterling are weighing on the FTSE 100 ahead of the Bank of England rate decision. Shire, Randgold, Aviva and Immarsat are amongst the companies reporting earnings updates.
The British pound has slowed into a narrow trading range in the days before the BOE policy announcement. GBPUSD has been constrained between 1.32 and 1.325. A rate hike would still be a big surprise, but probably less so that at any time in that last eight years. Assuming rates remain on hold, the quarterly inflation report will be key. We think the central bank will try to emphasise slowing growth, the main reason to keep rates low over rising inflation, the main reason for a rate hike.
The US dollar slide has eased slightly in Asia but not before EURUSD topped 1.19 for the first time since 2015. It’s still the US dollar rather than US stocks that are taking the fall for Trump’s stumbling policy agenda.
The new sanctions don’t hurt US businesses in Russia. Markets are just bothered that the President is so hamstrung by the Russian investigation that he is signing legislation he doesn’t believe in. Markets will be hoping Trump is sacrificing his desire for better relations with Russia to improve his chance of striking cross-party agreement on tax reform.
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