European markets are enjoying a strong end to the week, feeding off a weaker US inflation reading than many had anticipated. While the surprise decline for both core and headline CPI initially helped lift all markets, we soon saw a rotation from big tech to more cyclical stocks. While some will fear the repercussions of a slump in big tech valuations, investors will be encouraged at the prospect of a more broad-based bullish environment for equity markets. Interest rate cuts from the likes of the ECB and the Bank of Canada may have occurred ahead of any fed reserve easing, but the willingness to further widen that interest rate differential will be questionable given the potential outflows in capital towards the US. With that in mind the recent declines for US core PCE and CPI inflation has helped lift expectations for a September rate cut which in turn bolsters claims of similar action from the other major central banks.
Overnight trade data released from China highlighted continued concerns for their major trade partners, with imports slumping by 2.3% over the year to June. This represents a four-month low for Chinese imports, raising concerns over those businesses and economies relying on Chinese consumption. The notable disparity between exports (8.6%) and imports (-2.3%) does highlight the relative weakness of the Chinese consumer compared to global demand trends. This should come into light once again next week with the latest GDP, retail sales and industrial production data being reported on Monday.
Looking ahead, today will likely be dominated by the big banks, with JP Morgan, Wells Fargo, Citigroup, and BoNY Mellon all reporting before the bell. There are considerable concerns coming into this second quarter earnings season, with FactSet expecting a 10% decline in year-on-year earnings growth for banking stocks in Q2. With traders having grown accustomed to a widening disparity between the strengthening big banks and stuttering regional banks, traders will be hoping that these Wall Street giants can continue to outperform despite predictions of a more difficult environment.
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