Buy the dip mentality put to the test on Thursday; Madrid prepares to trigger Article 155; softer Chinese data partially blamed for profit taking; UK retail sales miss should be a warning to BoE.
U.S. futures are coming under a little pressure on Thursday, a day after the Dow closed above 23,000 for the first time ever, in what appears to be some profit taking following an impressive run for stocks.
While there were no major triggers for this morning’s decline, the finger is being pointed at the softer Chinese economic data and unrest in Spain, where the government announced its intention to trigger Article 155 and suspend Catalonia’s autonomy. While neither of these is a reason for traders to be bearish stocks right now, it has been pounced upon as the reason to take some money off the table and await further opportunities.
The situation in Spain is having a greater impact on the wider European markets, particularly in the IBEX which is down around 1% as investors prepare for more unrest in Catalonia. The euro has been very unresponsive to the developments in Spain so far and the same is true again today, with the single currency trading higher against the dollar, pound and yen. This is clearly seen as being a risk unique to Spain, rather than a problem that could develop elsewhere, although the Italian FTSE MIB has shown some vulnerability to it throughout the process.
It will be interesting to see how U.S. traders respond to the dip at the open. Sentiment has been extremely positive recently, despite the significant amount of political and geopolitical risk lingering beneath the surface. The global growth story is giving people great confidence that the rally has legs to it and earnings for the third quarter of likely to support that.
The Chinese economic data released overnight was broadly in line with expectations but did highlight the fact that the economy is slowing a little in the second half of the year. This was widely expected though as the government has reined in spending and focused more on cooling the housing market and reforms. We can expect more of the same in the fourth quarter although as we saw in the third, the improved global economic environment is likely to support the Chinese economy through this transition.
In the UK, retail sales wrapped up a week of important economic releases and left us with a bitter taste. Perhaps expectations were too high and a larger decline should have been expected following the strong showing in August but instead, the data fell well short of forecasts. The numbers further highlighted what we already know, the UK consumer is feeling the strain of negative real wage growth and this will take its toll on spending. While the inflation and jobs data may be seen as justifying a rate hike from the Bank of England, today’s data should be a warning to policymakers that the economy is not in a good position to take it.
While the focus today is likely to be how U.S. markets respond to early weakness, we will also get some manufacturing and jobless claims data from the world’s largest economy. We’ll also get third-quarter earnings reports from 20 S&P 500 companies including Verizon, Paypal and Travelers. Esther George of the Federal Reserve is also scheduled to appear while Chair Janet Yellen is also believed to be meeting with President Donald Trump, who is understood to be making a decision on her successor in the coming days.