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China Remains in the Spotlight

Market movers today

Today brings the final August PMI figures for the euro area and the flash service PMIs for Italy and Spain. The service sector PMIs in both Spain and Italy have been above 50 the whole year indicating a continuous expansion of the service sectors. Today it will be interesting to see if the service PMIs in the two countries followed the euro area figures and dropped below 50 in august.

In the euro area, we will also receive the producer price index for July. After the sharp increase in producer prices in 2021 and 2022, the index has fallen like a stick this year. We expect that the decline continued in July both on a monthly and annual basis. Consensus is looking for a print of -7.6% y/y and -0.5% m/m. This will continue to weigh on goods inflation.

From ECB both Lagarde and Schnabel will be on the wires.

The 60 second overview

This morning, Caixin Services PMI for China came in weaker than expected, again fuelling fears that the economy is slowing down. The index fell to 51.8 in August (cons. 53.5), its lowest level this year, from 54.1 in July. Asian equities are on the red on the back of this while concerns regarding Country Garden’s default add to the weak investor sentiment. The property developer has only a few hours left to make coupon payments on its dollar bonds. Yesterday, a local media outlet reported that the company is also seeking to extend repayments on seven yuan-denominated bonds, by three years, including a bond that is due in September 2025.

We have updated our economic projections for the Nordic economies, Euro area, the US and China. While the US is performing better than expected and can probably avoid a recession, the same is not true for other economies. We have not seen the full effect of the sharp rise in interest rates, and there is a high degree of uncertainty and risks for the near-term economic outlook. The Nordic countries, like the rest of Europe, will likely face a period of more or less stagnating economies and modestly higher unemployment. Read more in Nordic Outlook – Divergent fortunes, 5 September.

Equities: Global equities were marginally higher yesterday lifted by Asia while European markets were slightly lower and the US market was closed for Labour Day. It is worth nothing the cyclical outperformance in Europe despite the sluggish performance. Both tech and consumer discretionary were higher while utilities, consumer staples and communication service were all lower. There were not that many drivers with US markets closed. In Europe yesterday, STOXX 600 -0.1%, FTSE 100 -0.2%, DAX -0.1%, CAC -0.2%. Asian markets are lower this morning as we have got sluggish Chinese service PMIs coupled with surprisingly high Japanese CPI data. European and US futures are also down this morning.

FI: There was a modest rise in the European government bond yields of 3-5bp in the 10Y segment. With the US market closed, activity was low, but the primary market continues to be very active especially in the covered bond market, where we see issuance in the 5Y segment. Furthermore, EIB is coming to the market with a 5Y deal and World Bank coming to the market with a 15Y deal.

FX: Markets were off to a quiet start to the week with US markets closed on Monday and EUR/USD trading broadly sideways. While the recent Chinese stimulus has improved Chinese risk sentiment this has only offered limited support to CNH, with USD/CNH ending the day marginally higher and EUR/CNH recovering from Friday’s lows. Oil prices continued its move higher during yesterday’s session with Brent above USD88/bbl. This offered support to NOK, which keeps trading in the lower end of the last weeks’ tight range.

Credit: With US markets closed on Monday, credit markets had less information to trade on and were thus relatively calm. iTraxx Main tightened 0.5bp to close at 69.6bp, while iTraxx Xover tightened 3.5bp to close at 392.2bp. Among more notable events, Assa Abloy launched a widely anticipated EUR benchmark deal, to fund recent large M&A. The deal will be across three tranches and is likely to launch during this week.

Danske Bank
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