EQUITIES: Latest Pullback for E-Mini S&P Appears to Be Only a Shallow Correction
The primary trend set-up in Eurostoxx 50 futures is bullish, however a corrective bear cycle remains in play. Recent weakness resulted in a breach of 5370.73, the 50-day EMA. The clear break of this average strengthens a short-term bearish threat and signals scope for a deeper retracement towards 5166.00, the Aug 1 low and a key support. On the upside, initial resistance to watch is 5384.25, the 20-day EMA. A clear break of it would be bullish. A bull cycle in S&P E-Minis remains intact and the latest pullback has once again proved to be a shallow correction. The contract has traded to a fresh cycle high, breaching the Aug 28 high of 6523.00. This confirms a resumption of the uptrend and maintains the price sequence of higher highs and higher lows. Sights are on 6543.75 next, a Fibonacci projection. Initial support to watch is 6447.06, the 20-day EMA.
- Japan's NIKKEI closed higher by 438.48 pts or +1.03% at 43018.75 and the TOPIX ended 25.14 pts higher or +0.82% at 3105.31.
- Elsewhere, in China the SHANGHAI closed higher by 46.638 pts or +1.24% at 3812.514 and the HANG SENG ended 359.47 pts higher or +1.43% at 25417.98.
- Across Europe, Germany's DAX trades higher by 49.22 pts or +0.21% at 23819.09, FTSE 100 higher by 29.72 pts or +0.32% at 9246.61, CAC 40 up 9.37 pts or +0.12% at 7708.29 and Euro Stoxx 50 up 10.65 pts or +0.2% at 5357.36.
- Dow Jones mini up 8 pts or +0.02% at 45696, S&P 500 mini up 14 pts or +0.22% at 6524.75, NASDAQ mini up 105.75 pts or +0.45% at 23773.5.
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GERMAN DATA: SME Sentiment Remains On Track For Recovery - KfW
"German SMEs are increasingly optimistic about the coming months. As a result, the business climate in the sector rose for the fifth time in a row in July – this time by 1.6 points to minus 12.4 points. Although this is still below the long-term average, which is marked by the zero line, the economic upturn seems within reach." - via KfW
- "Although small and medium-sized enterprises rated their current situation only marginally better than in the previous month, their business expectations for the next six months rose significantly, pushing the index further out of its slump."
- The KfW SME Barometer is produced by IFO and is based on the "institute's economic surveys" - so some correlation with the broader IFO business climate (which has been trending upwards this year) does not come unexpected.
- Business sentiment in Germany is, on balance, trending upwards more broadly, with also the Manufacturing PMI standing at cycle highs. The services PMI meanwhile has seen some volatility but little overarching directional trend this year.
UK: Gov't Faces Stark Choice On Tax Hikes Amid Slumping Support
The government is walking an increasingly difficult political tightrope as it faces a bleak fiscal outlook while also attempting to shore up its public support. As noted earlier (see 'STIR: Under 50bp Of Cuts Priced Through Dec, NIESR Note Fiscal Issues', 07:44BST), the National Institute of Economic and Social Research (NIESR) think tank published a report on 6 August outlining the significant fiscal shortfall Chancellor of the Exchequer Rachel Reeves faces ahead of the autumn Budget. The NIESR exec summary notes: "The Government is not on track to meet its ‘stability rule’, with our forecast suggesting a current deficit of £41.2 billion in the fiscal year 2029-30. Substantial adjustments in the Autumn Budget will be needed if the Chancellor is to remain compliant with her fiscal rules."
- NIESR Deputy Director for Macroeconomics Stephen Millard told the BBC, "If [Reeves] wants to raise £40bn then I think one of the big taxes [VAT, employee National Insurance or income tax] is going to have to be raised. If she does that, then it will break the Labour promise about raising taxes on working people."
- Support for the governing centre-left Labour party has slumped since the July 2024 election (see chart below). The right-wing populist Reform UK of Nigel Farage has surged into first place in opinion polls, with its numbers (enough to potentially provide it a Commons majority in 2029) proving 'stickier' than many pundits anticipated.
- With Reform UK benefiting from significant public anger at Labour's handling of immigration and crime, breaking its manifesto promises on tax could further damage the gov'ts standing ahead of elections to the Scottish and Welsh parliaments and English local councils in 2026.
- Betting market data from Smarkets shows a 66.3% implied probability that PM Sir Keir Starmer is out of office by 2029, the year of the next general election. A poor set of results for Labour in 2026, engendered in part by tax hikes, could see Starmer's odds of political survival drop further. Deputy PM Angela Rayner, sitting further to the left of Starmer, is seen as the bookmakers' favourite to be the next Labour leader.
Chart 1. General Election Opinion Polling, % and 6-Poll Moving Average
Source: YouGov, More in Common, Opinium, Techne, Find Out Now, Freshwater Strategy, BMG, Survation, Lord Ashcroft Polling, Focaldata, JL Partners, Whitestone Insight, Deltapoll, Stonehaven, We Think, MNI
CROSS ASSET: Yen extends losses, Yields are edging higher
- Some broader lows for the yen here, against the USD, EUR, AUD, GBP.
- The best performers in G10 against the Yen are still the NZD closely followed by the Aussie, NZ employment and the earlier Risk On tone have been supportive of both Currencies.
- The US Yield has also played a part, TYU5 makes an attempt at 111.31+, this was Monday's low, but overall this future level is still a 1 big figure away from where TYU5 traded at pre NFP, at 110.28.
- The Long end part of the curves are weighing in Europe and the US, helping tilt the curves on the steeper side.
