Markets
End last week, the risk-off correction halted. Indications on slower growth in China lost their grip on global trading. Investors were (and still are) pondering the potential impact of the corona variants on future growth and on the CB’s reaction function, especially on Fed bond-buying tapering. This topic will be closely watched at the Jackson Hole symposium starting on Thursday evening. With respect to the growth story, today’s PMI’s could bring some clarity. The preliminary EMU PMI’s confirmed a solid recovery. The composite output index printed at a strong 59.5, only slightly lower from last month’s 60,2 which marked a 15-y high. According to Markit, growth in the services sector overtook manufacturing as COVID-19 containment measures are eased further. Inflow of orders slowed slightly but remains among the highest in the past two decades. Persistent optimism and strong orderbooks caused employment growth matching the highest level in 21 year. At the same time, Markit mentions: “Supply chain delays continue to wreak havoc, however, leaving companies frequently unable to meet demand and pushing firms’ costs higher”. Markit also sees an upward movement on wage growth which, along with other supply disruptions, could lead to higher inflation. It’s very long call from a monthly PMI report to ECB policy, but progress should also be visible in the ECB forecasts to be released at the September 9 policy meeting. As is often the case, the reaction to EMU data was modest, but at least the PMI’s had some impact. European yields were already supported by a better global sentiment. The German 10-y yield at some point gained more than 3.5bp, but momentum eased going into the US dealings. Yields changes currently vary between unchanged (2-y) and +2.5 bp (30-y). US Treasuries outperform with 2 & 5-y yields little changed and the long end rising only slightly (+1.0 bp for 30-y). Other risky, cyclical assets including the likes of oil (brent $67.3 p/b) or copper are rebounding off last week’s correction lows. European and US equities are gaining about 0.5%. Evidently this is more due to global sentiment rather than a reaction the EMU PMI’s. By the way, the US Markit composite PMI released as we are concluding this report unexpectedly dropped from 59.9 to mainly driven by a setback in services (55.2 from 59.9).
On the FX market, EUR/USD tries to build on Friday’s tentative bottoming, trying to leave the 1.17 area behind. An important part of this move already occurred before the publication of the EMU PMI’s. A constructive risk sentiment and a limited rise in US yields eased the USD-bid. EUR/USD is trading in the 1.1740 area. The DXY trade-weighted dollar dropped back below previous resistance at 93.43 (currently 93.15). Last week, the sterling faced headwinds from a series of disappointing/less convincing data. Today’s UK services PMI (55.5 from 59.6) extended this series and also pushed the overall composite index to 55.3 from 59.2. Manufacturing (60.1) showed stronger resilience. At least today, the weaker UK growth momentum didn’t cause any further damage for the UK currency. EUR/GBP hovers in the 0.8575 area. Cable (1.370) rebounds off the 1.3572/1.3602 support area. Commodity related currencies including the loonie (USD/CAD 1.2725), the aussie (AUD/USD 0.7185) and kiwi dollar (USD/NZD 0.6970) are trying to fight back after last week’s battering.
News Headlines
The German Bundesbank in its monthly report warned the “delta variant and a slowing vaccination dynamic could lead to stricter protection measures”, resulting in a recovery this year that’s less strong than previously expected. After activity in the first half of the year disappointed, total growth in 2021 could turn out to be a bit lower than the 3.7% projected in June, it said. The manufacturing sector in particular is undergoing consequences of raw material shortages and supply-chain bottlenecks. Growth should still reach pre-pandemic levels in the summer or the autumn. Inflation is another source of uncertainty, the BuBa added. Rising prices have been passed on to consumers to a larger degree than expected.
