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Dow Below 26K Amid Growing Recession Fears

Wall Street closed sharply lower and Asia markets followed in its footsteps overnight. Political unrest in Hong Kong as protestors brought the airport to a standstill, political uncertainty in Argentina as current President Macri unexpectedly lost in the primaries, added to ongoing trade tensions, hitting sentiment.

US and European futures are pointing to a cautiously higher start on the opening bell, as investors look to claw back some of Wall Street’s deep losses from Monday. The Dow closed 1.5% lower.

Whilst the safe haven trade was crowded on Monday, flows into the Japanese yen and Swiss Franc are slowly unwinding in early trade on Tuesday. Gold, however, remains well bid as it extends gains to stay firmly over the key psychological level of $1500 and push towards fresh 6 year highs above $1520. The move higher comes despite technical indicators such as the RSI pointing to strongly overbought conditions.

Whilst data was in short supply on Monday, the economic calendar picks up today with potentially high impacting prints from UK, Germany and US. With recession fears swirling for all three of these economies, investors will be paying close attention to the data. Trading volumes are low as summer holidays are in full swing; surprises in the data could create some big swings. 

US CPI to boost gold?

The US CPI report is critical for both the Federal Reserve and the dollar. Expectations are for US inflation to hold steady at 2.1%. The Fed recently cut interest rates owing to concerns over the slowing economy amid the ongoing US – Sino trade war and thanks to concerns over inflation. A reading of 2.1% would be keep inflation above the central banks’ 2% target. However, given US recession fears, the markets could be particularly sensitive to any weakness in the reading. A surprise to the downside could see the dollar give back today’s gains and gold rally through resistance at $1520.

German ZEW sentiment survey to hit the euro?

Recent German data releases have been dismal. Industrial production at 9 year low, exports slumped 8% yoy - all point to a contraction in Q2 (see Wednesday GDP release) underscoring the struggles that the German manufacturing sector is facing. Today traders will look to German ZEW economic sentiment figures for further clues as the likelihood of a recession later this year. Lat month economic confidence fell to an 8-month low. Expectations are for sentiment to continue declining amid ongoing US – Sino trade dispute concerns. A soft reading could see the euro extend early losses and break out of its current range on the downside through $1.1167.

UK Labour report to support GBP?

Whilst unemployment is expected to remain at 3.8% wage data could offer some short-term support to the pound. Wages are forecast to increase 3.8% in the three months to June, ahead of the previous months 3.6% (the fastest pace of growth in 11 years). Labour data is a lagging data and Brexit is the key driving force for the pound. Even in the case of a strong wages reading pound strength could be short lived if Brexit news flow is favouring  no deal Brexit.


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