Markets Yesterday’s disappointing EMU PMI’s were the dominating trading theme for markets. The manufacturing sector in particular continues to underperform with the indicator in Germany slipping to a very weak 43.1, the lowest in 7 years. The weak data adds pressure on the ECB to ease, which caused the Bund to spike and Euro rates to slip, mainly on the longer end of the curve. Germany’s yield curve bull flattened with yields changes varying from flat (2-yr) to 3 bps (30-yr) lower. Peripheral spreads joined the yield decline, narrowing 3 bps in Greece and up to 9 bps in Italy, which profited additionally from political uncertainty easing. US yields suffered the same fate, changing -2 bps (2-yr) to -3.8 bps (10-yr). The soft PMI’s were the last input for the ECB which holds its policy meeting today. Market expectations are high: money markets discount a 54% (!) chance of a rate cut already today. We think that’s overdone and expect the ECB rather to flag a move in September. Draghi’s tone during the press conference will be as soft as possible however. Markets are frontrunning stimulus already quite a lot so risks are that Draghi fails to deliver something ‘tangible’ today. We don’t think that would start a durable uptrend in (German) yields though.
A new set of poor EMU PMI’s pushed EUR/USD further south in the 1.11 big figure yesterday. Even so, the damage for the euro could have been bigger, given the PMI miss. EUR/USD soon found an intra-day equilibrium in the 1.1130/55 area. The 1.11 range bottom at was left intact. US Treasury secretary Mnuchin said he doesn’t want a weaker dollar short term and he believes in a strong dollar that mirrors a strong US economy in the long term. The comments didn’t help the dollar much. EUR/USD closed at 1.1140. USD/JPY (close at 108.19) profited only modestly from the S&P and the Nasdaq setting new all-time record levels.
The dollar is little changed this morning. Asian equities mostly show modest gains. RBA governor Lowe confirmed that the bank is prepared to ease policy further of needed and that it is reasonable to expected an extended period of low rates. The Aussie dollar is losing a few ticks (AUD/USD 0.6970 area). The ECB policy decision will be the dominant factor for global (FX) trading today. A (weak?) Ifo will be seen as confirming the need for further ECB stimulus. ECB’s Draghi is expected to prepare markets for a September rate cut and lay the groundwork for a restart of QE. Question is whether he will be soft enough to push EUR/USD below the 1.11 bottom as investors also still ponder the potential ‘reaction’ of the Fed next week. Draghi probably has to bring something ‘unexpected’ to force a break lower in EUR/USD.
EUR/GBP drifted further away from the 0.90 mark yesterday. The move was both the result of a weak euro (poor PMI’s/ECB anticipation) and of a further reduction of sterling shorts as the ‘event risk’ of the nomination of a new PM was out of the way. Boris Johnson as expected installed a pro-Brexit Cabinet. This Cabinet will meet today and markets will look out for the priorities of the new government. Plenty of Brexit noise might resurface when the UK and the EU will meet again to solve the stalemate. It is maybe too early for investors to reinstall sterling ‘shorts’ to prepare for the rising risk of a no-deal Brexit at this time. We are neutral on sterling/EUR/USD short-term.
News Headlines
RBA governor Lowe said it is reasonable to expect low rates for an “extended period”. He added that the central bank is “strongly committed” to get CPI to its target range, reiterating that policy can be eased further if needed. The Aussie dollar dipped below AUD/USD 0.70 yesterday and extends the decline after Lowe’s comments (0.697).
Italy is mulling a €10 bn tax cut package in its budget for next year, Deputy PM Salvini said. He explained it would consist out of 2 or 3 tax reduction schemes for families to run alongside other measures for businesses.
