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European exceptionalism? Led by a rebound in France and Germany,  business activity in the Eurozone picked up sharply in July, whilst the dogged British shopper has lifted UK retail sales back to pre-Covid levels. At the same time, US jobless claims unexpectedly rose amid a surge in cases which is being replicated in many other large economies, but not so much in Europe. Could Europe and the UK be handling the reopening phase of the pandemic better, and does this suggest economic outperformance? The obvious answer is that it’s not that simple – more on this below.

Stocks and other risk assets slid sharply as rising US-China tensions and a concerning US jobs report conspired to take the shine off the equity market gloss, with a decline in US big tech names weighing heavily on the broader market. The DAX fell 2% in early European trade and the FTSE 100 fell back under the 6,100 level after Chinese shares led Asian markets lower in a brutal session.

The S&P 500 declined over 1% yesterday fell as big tech shares slid. When big tech falls so does the whole market. The S&P big five – Amazon, Apple, Alphabet, Facebook and Microsoft – which now make up almost a quarter of the index by market capitalization – were all down more than 3%, with Apple off 4.5% after a note from Goldman Sachs called the rally in the stock ‘unsustainable’. Intel share plunged 10% after it warned on delays to the next generation of microchips which is having a clear read across to European technology sector this morning.

US-China tensions are a concern as the latter retaliated for the closure of its consulate in Houston by telling its American friends in Chengdu to shut their consulate. I would reiterate that this kind of tit-for-tat is not new; a trade war has been raging for years – what’s new is the coronavirus and a presidential election in a few months.

The weekly US jobs report was very disappointing and indicated that the progress made as lockdown ended has not just stalled but gone into reverse as various states rolled back their reopening. Against expectations for a flat reading of 1.3m, initial claims in the week to July 18th actually rose 100k from the week before to 1.4m. Continuing claims were better than expected at 16.2m vs the 17m anticipated. It looks like the surge in coronavirus cases across the ‘Sun Belt’ and other areas of the country, which caused many states to pause or roll back reopening of the economy, resulted in an increase in layoffs. The question we will continue to ask is how much is temporary and how much is permanent?

Futures indicate the S&P 500 to open lower and down marginally for the week, which has been quite a volatile one. Monday’s aggressive rally at the close was countered by a sharp reversal in the last hour of trade on Tuesday before the uptrend resumed to take the broad market to its best level since February. What we are seeing is a slow grind and lots of indecision, which could be the hallmark of the next 6 months with a largely sideways but volatile market.

Watching the data remains a tough ask – PMIs will show rebounding sentiment, but these are full of flaws and may not be entirely relied upon. Harder data like the unemployment claims report is not as sensitive to mood swings and will continue to indicate a long hard slog before we get back to pre-Covid levels.

Nevertheless, we are seeing some better data here in Europe. Germany’s manufacturing PMI rebounded into positive territory for the first time in 19 months, whilst France’s services PMI accelerated at a healthy clip. Combined, the Eurozone composite PMI moved up to 54.8 from 48.5 in June and was ahead of the 51.1 expected. I would issue the usual caveats about the nature of these diffusion indices, which only ask survey participants if things were better, worse or the same as the previous month. But at least they are positive – things are clearly looking up, albeit from a very low base level during lockdown. Can it last is the big question, and with backlogs of work declining and costs rising the picture for employment is not good. On the face of the headline numbers are encouraging, but these mask some real trouble ahead and a long, hard slog to get back to pre-Covid activity levels.

And today’s UK retail sales print is encouraging in some ways. Sales rebounded 13.9% in June, which easily beat expectations and came after May’s 12.3% jump. Taken together, the increases in the volume of retail sales in May and June have brought total sales back to a level similar to as before the pandemic. Ex-fuel, total retail sales are better than they were a year before. But on-food and fuel sales, while up sharply, are still not back to where they were before the lockdown took hold. High streets are being stripped bare, but at least you can now stick a four-storey block of flats without any planning permission where the grocer used to have his shop.

Gold continued to push up as US real rates edged even lower with the rally only encountering resistance close at the $1,900 round number and a retest of this level looks likely. US 10yr TIPS  declined again to –0.90% as benchmark 10yr Treasury yields slipped under 0.6%. The record at $1,921 is well within sight and the bulls are not about to let go of this opportunity to set an all-time high.

In FX, the euro continues to make ground against a faltering dollar as DXY slips to its weakest in almost two years. EURUSD has notched 5 straight positive sessions and momentum to the upside appears strong. The pair has broken free from the Jan 2019 resistance around 1.1570 and is trying to make 1.16 stick. Decent German PMI data helped sentiment towards the euro this morning, with the composite reading up to 55.5, ahead of expectation. However, the broad risk off tone to the market on Friday is underpinning some bid for the dollar which could see the rally falter, at least in the near-term.

GBPUSD held gains above 1.27 and moved clear of the 200-day SMA in a bid to clear out the descending trend resistance, even as the tone from the Brexit negotiators yesterday did not bode well for the chances of securing a deal.  If cable can make this move stick it opens the path back to 1.30 despite the Brexit worries, chiefly as the long dollar trade unwinds.

Chief negotiator for the EU, Michel Barnier, said a deal was unlikely by the end of the year. We should also remember that the pound faces multiple downside risks in terms running large twin deficits, a protracted economic recession from Covid that is forecast to be greater in magnitude than Europe and the RoW, and talk of negative rates still holding water. However, we can also look are record low and negative gilt yields as a sign that the UK is not seen in any real danger of exploding debt loads. Britain still has some friendly strangers to count on, or perhaps just a sign that central bank intervention is working well.

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