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UK Q2 GDP in focus ahead of FOMC, Europe's banks

Europe’s markets look set to open higher this morning on reports from Japanese media that a new stimulus package of measures from the Japanese government could well amount to over 25trn yen. It should be noted that this has come 24 hours after Japanese markets sold off on reports that any package could well fall short of expectations, after comments from finance minister Taro Aso earlier this week.

Given recent movements in Japanese markets it strikes me that the media and Japanese media in particular have too much time on their hands and maybe we should all wait until any measures are announced later this week.

It almost seems like an irrelevance to talk about the first snapshot of UK Q2 GDP given recent events as a result of the Brexit vote just over a month ago, but this could be as good as it gets for a while for the UK as we get our first look at these numbers today. They are expected to come in at 0.5% due to a fairly decent start to the quarter, though as more data becomes available we could well see them nudged lower over the next few weeks.

The question as to their relevance comes from the fact that the numbers will tell us very little about how the UK economy looks like right now, though a decent number might offer more time for the Bank of England to reflect on policy options, ahead of next week’s MPC meeting in light of the surprise vote to leave the EU on the 23rd June, which came at the end of Q2.

The shockwaves of that decision are still reverberating around the world, as well as being dissected by investors and market participants alike, with speculation increasing that we could well see a further easing of monetary policy next week by the Bank of England in an attempt to mitigate the fall out.

Yesterday departing external member of the MPC Martin Weale announced he had changed his mind about the prospect of taking action on a policy easing in light of last week’s surprisingly sharp drop in the latest flash PMI’s which saw services activity drop to their lowest levels since early 2009.

Less than two weeks ago the Bank of England surprised quite a few people by leaving rates on hold, until the picture surrounding the UK economy became a little clearer.

The logic of this argument, given already low levels of interest rates was and is easy to justify given that the cost of credit isn’t really the issue currently, and given concerns about the effect that low interest rates are having on bank profitability is a fairly easy one to make, particularly when you look across the Channel at the train wreck that is currently unfolding in Europe, as a result of low and negative rates.

Deutsche Bank’s latest results this morning are likely to bring a sharper focus to this particular lens, particularly in light of the market reaction to Commerzbank’s numbers yesterday.

Even so Mr Weale’s comments coming on the heels of Chief Economist Andrew Haldane’s recent comments about a sledgehammer response has increased the prospects of some form of action at next week’s MPC meeting.

The risk is that the Bank could well end up acting in haste, firstly because last week’s PMI’s were based on nine days of data between 12-21 July, which in the aftermath of the political turmoil could well be heavily skewed by some of the hysterical media coverage leading up to that period.

Next week we could well see some upward revisions to these numbers, when the final numbers for July get released, given that Theresa May took over as UK Prime Minister just after the beginning of the survey period, and in so doing appears to have steadied nerves quite substantially. We could well also see a potential pick up in August into year-end as it becomes apparent that the UK government is in no rush to trigger article 50.

Later on the US Federal Reserve concludes its two day policy meeting where the FOMC is expected to leave policy unchanged, despite some improvement in recent economic data. Policymakers can point to the fact that payrolls were better than expected for July, but inflation still remains benign and some economic indicators are still showing signs of softness, yesterday’s weaker than expected services PMI being a case in point. 

This means that the Fed can afford to wait as the dust continues to settle in the aftermath of the UK Brexit vote as well as events in Europe surrounding the banking sector, which could still throw an enormous fly in the ointment.

Reports that Italy’s oldest bank Monte Dei Paschi di Siena are looking to secure a €5bn cash call ahead of stress tests results this Friday has seen its share price stabilise yesterday, but given it has already seen €15bn in bailout funds disappear up in smoke in the last 8 years it would be a brave, or foolish investor who puts money in this particular black hole.

The bank currently has about €47bn worth of non-performing loans and has a market cap of less than €1bn.

EURUSD – still finding it difficult to rally with the bias remaining towards a move towards the March lows at 1.0825. To stabilise we need to see a move back above the 1.1250 area.

GBPUSD – while above trend line support at 1.3050 the risk remains for a move back through the 1.3300 area and up towards the range highs near 1.3500.  A move below 1.3000 would negate, and argue for a return towards 1.2800.

EURGBP – having peaked just above the 0.8600 area earlier this month the euro has struggled to overcome trend line resistance at 0.8420. With support at 0.8260 and resistance just above the 0.8400 area, the risk is for a move below 0.8250 towards the 0.8100 area.

USDJPY – having failed at the 107.50 area and posting a key day reversal in the process, we remains susceptible to further losses. This suggests we could see a slide back towards the 103.50 area, now that we’ve dropped below 105.20 and the lows last week.

Equity market calls

FTSE100 is expected to open 16 points higher at 6,740

DAX is expected to open 63 points higher at 10,310

CAC40 is expected to open 28 points higher at 4,422

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