Full Metal Smack It

Originally published by CMC Markets

It’s a broad based sell-off across Europe as dealers are worried about the currency crisis in Turkey, and the cooling of Chinese growth.

Europe

European banks have lost ground today as investors are concerned the financial problems in Turkey could spread to the eurozone. Natural resource stocks like BHP Billiton (LON:BLT), Rio Tinto (LON:RIO), Randgold Resources (LON:RRS) and Glencore (LON:GLEN) are all lower on the session as metals are under severe pressure. Copper, platinum and palladium are weaker as traders are concerned the Chinese economy is cooling, and yesterday’s disappointing fixed asset investment and industrial production reports from Beijing confirmed their fears. The renminbi has been steadily losing ground versus the US dollar since March and it’s near its all-time-low, and that sums up the cautious sentiment surrounding China.

Balfour Beatty (LON:BALF) proved that their turnaround plan is working well as the firm revealed a 69% jump in first-half operating profit. Revenue slipped as the company is slimming down and being more selective about what projects it takes on, but higher margins and lower costs drove up profits. The group confirmed they are either achieving industry standard margins or they will be in the second-half. The UK government has a lot of infrastructure projects in the pipeline, and this is likely to be beneficial for the firm. Balfour upped its interim dividend by 33%, and said it is on track to achieve its full-year target. The stock has been broadly moving higher for the past year, and if the bullish move continues it could target 310p.

RBS's (NYSE:RBS) shares got off to a positive start this morning after the bank confirmed it will pay an interim dividend of 2p – it will be the first dividend since the credit crisis. RBS is to pay a $4.9 billion fine to the US department of justice for misconduct before the credit crisis. The finance house conditionally said it would pay an interim dividend earlier this month, but the stock has been slipping since then. According to the Financial Conduct Authority, RBS is the least UK least popular bank, as it finished last in both personal and business banking surveys. The stock has been in decline since May, and if the negative move continues it could target the 225p region.

US

Equity markets are firmly lower as traders on Wall Street are also alarmed about the state of geopolitics. The slowdown in the Chinese economy is the main driver of the decline in the US. No doubt President Trump will view the slump in Chinese stocks and the renminbi as further proof that the US is winning the trade war. Mr Trump isn’t a man to go easy on his opponents, and it is likely he will keep his tough stance against Beijing.

Tencent (HK:0700), a Hong Kong listed Chinese tech company posted disappointing figures after the Asian markets were shut, and this fuelled fears in The West that China’s economy is slowing down. The company’s revenue and profit both missed forecasts. Alibaba (NYSE:BABA) shares are in the red as the China related sell-off has gripped investors.

Retail sales jumped by 0.5% in July, which comfortably topped the 0.1% expected by economists. It is worth noting, that the June report was revised lower to 0.2% from 0.5%, so the update wasn’t as positive as initially thought.

FX

The US dollar index hit its highest level in over 13 months as traders flock to assets that they feel are lower risk. The Turkish lira crisis has triggered selling of other emerging market currencies, and funds are flowing into the US dollar.

EUR/USD has been hurt by the rally in the US dollar and it remains in a downward trend. Turkish banks have some of their loans denominated in euros and dealers are worried they could default. Some eurozone banks are also large shareholders in Turkish banks, and that is also playing on traders’ minds.

GBP/USD has been dragged lower by the firmer US dollar. The pound enjoyed a short-lived push higher on the back of the UK inflation report. The CPI level ticked up to 2.5% - meeting expectations, but the news couldn’t hold back the surge in the greenback. If the decline in the pound continues it could target 1.2590.

Commodities

Gold has fallen to its lowest level in over 18 months as the rally in the greenback continues to hurt the metal. Gold has been losing ground since April and it appears the pace at which it is falling is increasing. Should we see a break below the $1,175 region, the metal might target $1,150.

WTI and Brent crude oil sold-off sharply after the latest Energy Information Administration report showed an enormous build in US oil stockpiles. US oil inventories were 6.8 million barrels, while traders were anticipating a drop of 2.5 million barrels.