By Dean Popplewell
Capital markets are trapped in a range as investors await further details from the ECB on Spain, in particular when and under what circumstances the Iberian member will apply for financial aid or until China announces another RRR cut. Investors require strong market directional conviction to be wanting before initiating riskier trades ahead of September, when the market becomes exposed to a “flurry of binary events.” These events include eurogroup crisis meetings that will decide if the peripherals require financial aid, both Cbanks across the pond will decide if there will be non-conventional support for the markets and finally, the German constitutional court decision is expected to lead the way for using the ESM as a rescue tool. The current risk reward is not attractive enough for the remaining few to participate aggressively in this holiday illiquid month.
Global markets are pulling back after having rallied earlier in the week following downbeat data, on hopes that the worsening global economic outlook may prompt policy makers to take proactive rate action. To date, most of the main Central banks have boarded the ‘stationary’ monetary train, in other words, rhetoric continues to trump action, to many that action is been left to next month. One thing that is consistent is the downbeat data.
China overnight disappointed, it’s trade surplus narrowed sharply to +$25.1b last month, compared with a market forecast of +$35.2b, while exports increased just +1%, y/y, to an expected +8% increase. Along with new yuan loans trailing estimates, suggests that the global economy is weakening and raises the odds that the Chinese government will step up measures to support expansion. With the fear of a “hard landing” in the second largest economy, monetary policy easing is expected to be more aggressive in the remainder of the year. Separate reports showed that Chinese industrial output growth unexpectedly slowed last month to +9.2% from a year earlier and that retail sales rose +13.1%, trailing market expectations.
Europe was not going to be outdone. Data there this morning, on the whole is a tad softer than expected, though to many it’s mostly second tier stuff. U.K. PPI input prices were up +1.3% versus expectations of +1.5%, while output prices were flat on the month. The market will build a case that investors should expect some further easing from the “Old Lady,” despite been steered away from rate cuts in favor of QE. In France, IP was flat on the month versus expectation of a +0.4% gain, while both German and Italian CPI were little changed. However, lack of interest is causing lack of liquidity and a lack of true market direction. Even the peripheral FI markets are wider again, but under minimal volumes with pressure mostly coming from weekly bits of profit taking, especially in the front end of the yield curve, as dealers and day traders book speculative long profits before closing up shop. Otherwise, all assets classes so far are reporting little business going through.
The EUR’s lackluster performance this week, especially after printing a five-week high (1.2444), paints a picture of uncertainty for the single currency, as expected follow through gains have failed to develop. Not helping the currency performance has been the holiday season and lack of liquidity. This market apathy and lack of Cbank follow through again has the EUR testing some key support levels. It possible that the U.S. yield advantage could pressurize the single currency back to 1.22 stratosphere, as an outperformance of 2-year German product versus its U.S. counterpart suggests a move back to the spread wides of the summer. A EUR break below 1.22, with conviction, would very much dampen hopes for a 1.25 recovery. Technically, the momentum behind the short term bull wave, from the July 24 low at 1.2042 is clearly slowly down. Its not a surprise with the lack of enthusiasm that the retail sector have taken profit and currently sit EUR neutral, for now at least. The market prefers to be a better seller of EUR’s on rallies.