By Dean Popplewell
Overall it is expected to be a quiet data week either side of the pond as investors try to justify adding risk to their portfolios. Positive sentiment remains buoyant in early euro trading this morning, with both equities and the single unit tentatively rising outright on the back of some decent earning reports and along with Chancellor Merkel’s backing of the ECB bond buying plan. However, the release of periphery data continues to provide more information on the extent of the collapse of activity heading into the last of the hot summer days. Will this data end up keeping the anticipation of policy easing in Europe elevated, limiting scope for EUR upside even as systemic concerns abate? Some of the market continues to like buying risk on dips now that Draghi has committed to tightening peripheral spreads and while the major Cbanks stand ready to provide more stimulus. The contrarian still see current EUR levels as a good area to short risk. No matter what, it is the summer holidays for many, markets will be choppy and irrational, with growth still going to be hard to come by.
In Italy, the eurozone’s third largest economy, industrial production fell more than expected in June (-1.4%), dragged down by a sharp decline in consumer and intermediate goods production. The market was expecting a decline of -1.2%, and this certainly indicates that the economy probably contracted for a fourth quarter. Analysts note that production fell -8.2% from a year ago on a workday-adjusted basis. It looks like Prime Minister Monti’s austerity measures have deepened the economy’s fourth recession since 2001. Other data revealed that the Italian economy’s -0.7% fall in GDP was the fourth consecutive drop for an economy mired in recessions since the middle of last year and certainly is doing no favors for an Italian government who is “grappling with a debt crisis that threatens the whole region.”
Providing a surprise and more of a dive than a “bellyflop” was U.K. IP falling by far less than feared in June, down by -2.5%, month-over-month. This was less severe than the pace implied by the preliminary Q2 GDP data which had suggested a -4.1% drop. Analysts note that the bulk of the weakness was likely related to ‘the’ lost working day. However, the Office of National Statistics would not be able to quantify the impact until later in the year. What is key now is to what extent output recovered during Q3? There is likely to be a decent bounce next month as the effects of the lost working day reverse. However, stripping away from lost working days, survey indicators point to further contractions in output.
Overnight, it was not a surprise to see the RBA leaving the cash rate unchanged, in line with consensus (+3.5%). The following statement contained little “new” news, with the current monetary stance seen as appropriate. On the exchange rate, the RBA repeated its comment that AUD has remained high despite the fall in the terms of trade and weaker global outlook. The markets will now look to the quarterly Statement of Monetary Policy due out later this week for further policy guidance and new growth and inflation forecasts.
Providing a slight stinger in the EUR tail this morning is German manufacturing orders falling in June and performing a a U-turn from the previous month’s reporting as foreign and domestic orders slid (-1.7%). This would suggest that industrial production in the largest economy in Europe is slowing in Q3. It worth noting that May’s print was revised +0.1% higher to +0.7%. Digging deeper, domestic orders fell-2.1% in June after a -1.4% fall in the previous month. Foreign orders fell -1.5% compared with a +2.5% increase in May.
Despite a retail sector seemingly more comfortable shorting the single unit at current levels, the overall market continues to recover from its July 24 low (1.2042), trading to 1.2444 (+61.8% retracement of the 1.2693-1.2042 down-leg) last night. The technical analysts note that the overall momentum remains positive with the market potentially wanting to fill in the gap to Monday’s highs again. Above this level, momentum will be able to drag the market higher towards new interest to sell single unit again ahead of 1.25. Does this morning’s data side with the retail sector?