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European stock markets broadly followed Wall Street after US stocks snapped a two-day losing streak to rally handsomely as better economic data boosted sentiment even as bond yields rose. The FTSE 100 traded close to the flatline and the pound is steady ahead of the Bank of England meeting later. A solid rally for tech stocks lifted the Nasdaq by 2.6% despite yields moving higher.  

 

The US ISM Services PMI beat expectations, boosting the US dollar and lifted broader risk sentiment. The July reading was 56.7 compared to 53.5 expected, easing the immediate recession worries, whilst in another boost to the Fed the measure of prices paid decelerated to 72.3 from 80.1 – high but moving the right way. These numbers are ‘soft landing’ type numbers so the market lapped it up. Also, US factory orders for Jun +2% vs +1.2% expected. Treasury yields spiked and the 2s10s curve inverted further to –38bps, the most since 2000.  

 

Earnings continue to deliver, too. JPM: “With 67% of S&P 500 companies having reported, 69% are beating 2Q earnings (vs. 79% avg. last 4Qs) and 65% are beating revenue estimates (vs. 77%).” BofA says sell-side sentiment lowest in 5 years but still no buy signal yet; Wall St bracing for recession.

 

Even the European data was better, with German exports rebounding more than expected in June. Exports rose 4.5%, reflecting inflation but also suggesting supply chain pressures may be easing a touch. 

 

The Bank of England is expected to raise rates by 50bps today, but in a dovish fashion with big cautionary remarks about the outlook. Inflation expectations are likely to move up for this year, but the BoE won’t want the market to think it’s going super-hawkish. If it does deliver a more hawkish tone, GBP can get a lift but the base case for a ‘dovish’ 50bps hike could see sterling sold on the fact. Couple of things to consider: this would be the biggest hike since 1995. But inflation hit 9.4% in June and forecast to rise further this year. It’s not got nothing left to do if it wants any credibility. The BoE has been dripping rate hikes in a piecemeal fashion that has done nothing for inflation nor sterling because it’s been worried about the economic outlook (because, get this, of inflation!)– it requires a much more forceful message but we won’t get it today from Andrew Bailey, who remains out of his depth in terms of communicating policy.

 

OPEC delivered a minimal 100k bpd hike to production in September, which does nothing for the market but is a bit of a sop to calls for Saudi Arabia to do more. Despite an initially rising following the OPEC decision, both WTI and Brent futures declined around 4% to their weakest since February as the EIA reported a big bump in inventories. US crude stocks rose 4.5m barrels last week and gasoline stockpiles added 200,000 barrels, indicating weaker demand. 

 

Next always delivers: High Street bellwether or notable outperformer? Next raised its full-year profit forecast by £10m to £860m after a strong rebound in full-price sales. Q2 sales rose 5%, or 4.7% more than expected, down to the prolonged hot weather and a return to formal events like weddings both requiring wardrobe updates. 

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