It was another mixed day for global equity markets yesterday, with European markets having a good session, while US markets struggled.
The euro had a fairly decent day and for once European stocks found themselves finding some decent support at the end of a positive week for both, a rare convergence at a time when the opposite has been true in the last four months or so.
US markets slipped back with financials having a poor day, as US rate rise expectations diminished further. Disappointing economic data on the back of hurricane Harvey, as well as uncertainty about the pace of Fed policy in 2018 put bond yields under pressure.
Over the next few months it will be much more difficult to assess the pace of future rate rises given the wholesale changes that are set to take place at the top of the US central bank, and it is likely that any new incumbents could well be less hawkish than was the case earlier this year.
In Asia the latest China trade data showed that exports for August came in lower than July’s 7.2% rise, at 5.5%. Some of this slowdown can perhaps be put down to the rise in the yuan against the US dollar in the last two months which has seen it move from 6.79 at the beginning of July to 6.46 today. Exports to Europe also slowed sharply, coming in at 5.2% down from July’s 10.1% suggesting that the recovery in Europe might be starting to slow.
Imports came in at 13.3%, a nice increase from July’s rise of 11%, and suggesting that internal demand continues to hold up well, even If the rise in the yuan is holding back its exports a touch.
If it was the intention of ECB President Mario Draghi to try and keep a lid on the euro yesterday then judging by the price action, he failed abysmally. Draghi did make brief mention of the fact that the council was concerned about FX volatility, a rather strange thing to say given that the euro has been anything but volatile this year. The rise over the past few months has been pretty steady and pretty much one way traffic to the upside.
There was an acknowledgement that the exchange rate was an important factor when it came to growth and inflation, yet the staff projections for inflation were only adjusted modestly lower to 1.2% from 1.3% for 2018, based on an average exchange rate of 1.1800, over the next two years. This seems a rather conservative estimate since the exchange rate is already higher than the ECB’s estimate and well above the June forecast of 1.0900.
It was always going to be a difficult task for the ECB President to temper expectations about a potential tapering programme, given how positive recent economic data has been, so his admission that the “bulk of the decisions” surrounding any changes to the QE program would be taken next month wasn’t entirely unexpected.
Any other policy stance simply wouldn’t have been credible which suggests that the ECB remains on course for a downward modification to its QE program early next year, with the risk that the market is overestimating the amount the ECB may shave off its monthly asset purchase amount at the beginning of next year. It is unlikely to be a significant amount, at the most a reduction to €40bn a month, given that the Italian elections will be looming large.
In any case the direction of the euro won’t just be a function of ECB policy but also the recent weakness of the US dollar and here the greenback continues to look soft, helping keep a floor under US stock markets in the process, despite yesterday’s weak finish. Against a basket of currencies the US dollar fell to its lowest level since January 2015, and more significantly looks on course to close below its 200 week moving average for the first time since April 2014.
The pound has had a rather mixed week, doing well against the US dollar, while struggling against the euro, as UK politicians return from their summer break in much the same mood they left, as disagreements over the Brexit process continue apace.
For several months now the manufacturing and industrial production data from the Office for National Statistics has painted a completely different picture of the UK economy than the business surveys and PMI data which has been predominantly positive. In the June data last month there was some evidence that this anomaly was starting to correct itself, however the ONS data does tend to raise more questions than answers and today’s July data isn’t expected to be any different.
Industrial production is expected to rise 0.2%, down from 0.5%, while manufacturing production is expected to improve to 0.3% from 0%.
Construction output is expected to decline 0.3%, following on from a decline of 0.1% in June. The trade balance deficit for July is expected to narrow to £3.25bn from £4.5bn in June.
EURUSD – the euro pushed through the 1.2000 level and has pushed beyond the previous peaks at 1.2070, bringing the prospect of a move towards the 1.2300 level initially and potentially 1.2500. Support currently comes in at 1.1980, and below that at 1.1910.
GBPUSD – continues to edge up towards the 1.3140 area, but needs to overcome this level to retest the August peaks at 1.3268. Support now comes in at the 1.2980 area and below that at the 1.2850 area.
EURGBP – had a decent rebound from the 0.9115 area but we need to push through the 0.9220/30 area to keep the upside intact and a move towards 0.9300. While below the 0.9220 area we run the risk of a move towards the 0.9040 area.
USDJPY – support near the 108.10/20 area looks vulnerable as the US dollar takes out the April lows and this has the potential to open up the downside. Rebounds need to get back above the 111.00 area, otherwise we remain at risk of a move towards the 106.80 area.
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