FTSE lacks power to break 6650

An encouraging statement from Chinese Premier Li Keqiang on the subject of China’s growth was the catalyst for the strong start in European equities today, with the mining sector stacking up gains on the broadly positive sentiment.

European markets

The third time is meant to be the charm, yet despite the deluge of royal-baby-related optimism and the boost from Beijing, the FTSE 100 still lacks the impetus to break and close above the 6650 level, with investors likely to be sitting on the sidelines as the earnings season goes at full pelt.

UK mortgage approvals look to be benefitting from the government help-to-buy scheme, with the British Banking Association (BBA) data showing a rise in approvals by 2.7% on the month to 37,278 in June. With UK exports at their highest since the recession, and ultimately a more positive macro outlook emerging in the UK, there is now a palpable pressure on this week’s GDP release to meet expectations.

Glencore Xstrata led the gainers, adding 4.8%, while Tullow Oil was in the doldrums a result of an unsuccessful drilling project in French Giyana. The stock plunged 6.32%. Software company, Sage presented its third-quarter trading in line with expectations and had an upbeat outlook for the rest of the year. The share price climbed 4.3%

US markets

With nothing major of note data-wise for the US, investors’ attention is now fully focused on the corporate earnings schedule. Of the 122 US 500 companies that have reported earnings for Q2 already, 52% have beaten on sales, while 72% have beaten on earnings.

Having provided a fairly downbeat forecast for its full-year earnings earlier this month, economic bellwether United Parcel Services saw its Q2 profit fall 4% as a result of higher expenses, exacerbated by weighty oil prices and a challenging US industrial economy. Overall earnings came in at $1.07 billion, or $1.13 a share, down from $1.12 billion or $1.15 a share a year earlier.

Much discussion prevails regarding how influential both low interest rates and cost-cutting have been to global corporate profitability, and specifically the financial sector. This tends to beg the question as to how sustainable this model can be over the longer term as long as sales fail to match the profit growth.

All eyes will now focus on tech giant Apple, which will report after the bell. The company has struggled of late, underperforming the broader averages and falling an astonishing 19.6% to date. Consensus expectations are for Apple to report earnings of $7.32 per share on $35.01 billion in revenue for the quarter ended June 30.

If the markets are relying on bad news for an additional leg up, the huge miss in the Richmond Fed Manufacturing index as a result of contracting retail sales could be the trigger. The index came in at -11 versus the expectation of +8.
Given that US indices are at all-time highs, there is neither technical nor, it would seem, tactical resistance to any additional upside, with the S&P 500 threatening the 1700 level and the Dow eying the 15,600 level. Overbought conditions prevail nonetheless, which may well give rise to a sharp correction in the near term.

The Dow is now trading at 15,560, up 15 points.

Commodities

The move through the $1300/oz metric and the ensuing upward progress for Gold prices can to some degree be attributed to short covering. This area should not act as support given how resistant it was to upside pressure. A little profit-taking following yesterday’s surge was never out of the question, with the stronger US dollar also keeping the price in check below the $1340 level.

FX

Rising US treasury yields helped to strengthen the dollar in early trade and conspired to cap the euro gains around the 1.32 level. Despite a mild reversal in the greenback's strength ahead of US bond auctions this week, there appears to be a revival in peripheral European problems. Tomorrow's PMI data will probably confirm suspicions that all is not well, and the bias is for euro downside.

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