The news last night that China’s trade surplus hit 18 month highs in July would normally have been cause for cheer, however the markets chose to focus on the imports figure which slipped by a third coming in at around 22.7% instead of the expected 30% figure, and down from 34.1% in June.

This unexpected slowing in import growth put the skids under the mining and commodity sectors as profit-taking on the gains of the last few days started to kick in.

The desire to book some profits ahead of today’s FOMC meeting will also have weighed on sentiment as well but the figures out of China will have definitely given traders a further nudge in that direction.

The travel sector was also hit after TUI Travel warned profits this year will be at the low end of forecasts after UK bookings faltered. Bookings by Britons are down by 2% over the past 12 weeks with the Netherlands down by 3%. This later booking trend, blamed on good weather in UK and the impact of the emergency Budget, has adversely affected profitability. These worries also hit shares in InterContinental Hotels even though it said the hotel trade is recovering from the effects of the recession and posted a 22% rise in profits.

On the plus side defensive pharmaceutical shares are doing well with Glaxo, Shire and AstraZeneca all higher.

The US markets also opened lower on the back of lower European markets and they were given a helping hand on their way by poor non-farm productivity data for Q2 which showed a decline of 0.9% against an expectation of a gain of 0.1%

UK data out today has been a bit of a mixed bag with the UK trade deficit for June showing an improvement to £3.3bn with exports outstripping imports by 1.7%.

However, weaker housing data from the Royal Institute for Chartered Surveyors (RICS) and British Retail Consortium (BRC) retail sales data for July has prompted some profit-taking across the board as the pound pulls away from its 11 month highs and 82.54 double resistance level against a basket of currencies.

In the online spread betting markets, the US dollar looks set to post its second consecutive daily gain since mid July against a basket of currencies, heading into this evenings meeting as traders adjust their positions.

The recent falls in the US dollar and rises in equity markets have fuelled speculation that the Fed will increase quantitative easing at their meeting tonight, amid concerns that a failure to do so could send markets spinning lower. This fear seems overblown and to an extent some form of action appears to be priced in to the recent market moves.

A policy of “wait and see” by the Fed tonight could well see a continuation of this sharp correction in the US dollar from its recent lows, and prompt further declines in equity markets.

By James Hughes, Market Analyst, CMC Markets.

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