The US reacts to a jump in treasuries yields

US retail sales did not disappoint, climbing 0.2% in July, slightly below the expectations of 0.3%.

Retail sales ex-auto and gas were in line with expectations, jumping 0.4% from -0.1% previously. Reaction to the number was evident, from US equity markets finishing in the green after spending most of the morning in the red, to US 10-year treasuries yields jumping 10 basis points.

Further debate

Although the number was not impressive, reaction to the number - from the dollar strength to US equity and treasuries - proved the investment community expected the Fed to address the market expectations of tapering by the end of this year at the very least.

PPI tonight will further drive the theme of predicting when tapering will occur. If numbers are weak, this will fuel further debate on the Fed’s stance. This theme will continue until next Thursday, 22 August, when the Fed releases minutes from the FOMC.

In China, we continue to see activity from the government. This morning’s highlight was the country’s plan to cut capacity a year earlier than originally planned (Bloomberg). Looking at the CSI300, Chinese stocks seemed to have bottomed out in mid-Jun. The recovery over the past week was largely due to positive reactions to activities from the government and data that showed industrial activities have stabilised.

Premier Li Keqiang has taken targeted steps to support the economy, such as providing credit and tax breaks for small companies and supporting infrastructure projects which we see as meaningful reforms in keeping the economy going. Further upside is likely in the Chinese equity markets given the low valuations of price earnings ratio of 10, when the average over the past four years was 15, and continued efforts from the government in their reforms to move China towards a stabilised economy.

Commodities

Copper futures prices continue to hold up on the levels we are watching. Global growth appears to be in a better footing, with Europe coming out of recession and the US showing signs of recovery. China’s copper production showed a drop at the end of July, and copper imports rose. There could be consolidation towards the support level of $320 unless we see further catalysts.

Brent prices rose overnight on supply issues from Libya, Sudan and the North Sea. It tested the resistance level of $110, and fundamental concerns could see this level tested again. WTI retreated slightly on higher US stockpiles. Technically, WTI continues to test the $106 support level, possibly consolidating to $105.

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.