Will the Dax drop weigh on US stocks?

Summary:

• US indices to start lower after sell-off in Europe

• DE30 tumbles over 300 points; German inflation gains

• S&P500 dips below H1 Ichimoku cloud

There’s a bit of softness around in US futures ahead of the cash open with a sizable drop in the Dax, another inflammatory tweet on China from Trump and some possible pre-Fed jitters sending the markets lower. Having said that, it is perhaps surprising that given all of the above the S&P500 is called to open lower by only around half a percent this afternoon. 

While the pound continues to languish around multi-year lows the most eye catching move of the day so far has come in the Dax as the German stock market has experienced a swift drop lower once more. The benchmark performed a dramatic U-turn after the ECB meeting last Thursday and has experienced a comparable move lower today. There’s no immediate catalyst for the declines although disappointing earnings updates before the open from Lufthansa and Fresenius have done little to help the mood and the latest Trump tweet caused the sell-off to accelerate. Trump once more took aim at China in his barrage on social media and while the Fed (read or full preview here) will rightly take the Lion’s share of attention in the next 36 hours it is worth remembering that news on US-China trade talks could also move markets. 

The German Dax has tumbled over 300 point or 2% so far today in a move that is comparable to last Thursday’s declines. Source: xStation 

The crux of tomorrow’s Fed meeting for stocks will likely be if the Fed can communicate further easing in addition to the expected 25 basis point cut. A failure to do so, could see US stocks react in a similar fashion to their European counterparts on the ECB rate decision where they sold off aggressively. The ECB hinted that easing could be coming at the next meeting in September but stopped short of strong suggestions and this disappointed equity bulls. The inflation backdrop has been relatively benign for much of the year but the latest look at Germany has revealed an upside surprise, with the CPI Y/Y released this lunchtime coming in at +1.7% Y/Y vs +1.5% expected and +1.6% prior. However, this could be seen to be offset by the large fall in the HICP which in Y/Y terms fell to +1.1% from 1.5% prior against an expected 1.2%. 

Inflation in Germany, as measured by HICP, fell in the past month and suggests there’s little concern on this front to imply that further monetary easing isn’t necessary. Source: XTB Macrobond   

 The Fed’s preferred inflation metric has also delivered a timely supportive data point for the central bank, with the PCE core for June coming in at +1.6% Y/Y vs +1.7% expected. The prior was 1.6%. 

The decline in the S&P500 has seen the market move below the H1 Ichimoku cloud once more. Longer term there’s little doubting that the market remains in an uptrend but the weakness could grow a little larger ahead of the Fed and see price return back towards prior support around 2998. Source: xStation