The conflicting pressures on markets from political and economic matters are very much in evidence as we open up in Europe this morning. With the Labor Day holiday in the United States limiting liquidity and interest on the other side of the pond, we have one more session to trade through before we can legitimately say that summer markets are over.
Geopolitical issues are headed up by the situation in Ukraine at the moment. An escalation in both combat and rhetoric by President Putin and his forces before the weekend has culminated in calls for ‘statehood’ discussions for South-East Ukraine i.e. Crimea. Russian ruble hit a record low against the USD last week on the initial escalation and will be in the crosshairs this week as well.
Angela Merkel may have been the first to say it last week but we would be surprised if further sanctions on Russia are not levied by the US and EU in the coming days. Sanctions so far have been relatively effective and a further cranking of the pressure, via currency and payment controls, will turn the screw further. As winter gets closer and the pull of Putin’s control of gas supplies becomes more important then the ball will be very much back in Putin’s frozen court.
The first week of the month is always stuffed full of data but Thursday’s European Central Bank meeting will remain the most closely watched announcement. German retail sales dived on Friday but a stubborn shift higher in core inflation for the wider Eurozone may well stay the hand of the central bank for now.
Further cuts to an already negative deposit rate are possible soon, while the news that the asset management company Blackrock has been picked to consult on a possible QE plan will sit in the back of investors’ minds. We think neither are forthcoming this week and the heavy lifting of having to pressurise the single currency lower will once again have to be taken up by ECB President Mario Draghi. If he fails in that regard then another short squeeze on euro is very much possible.
We remain on course, we believe, for another round of dissent at this month’s Bank of England meeting. Once again, we think that McCafferty and Weale will repeat their vote for a 25bps increase in the Bank’s base rate but that the other members of the MPC will continue to hold fire. China’s PMI releases overnight have only increased fears that the world’s second largest economy is starting to lose momentum. A government issued PMI fell from 51.2 to 51.1 while an independent reading by HSBC fell to 50.2 from 51.7 the month before. CNY is slightly stronger on the session vs the USD.
Today’s run of European PMI data may afford some protection for the single currency. The various price indices will be able to show us whether input prices of raw materials are falling and whether manufacturers, particularly in the periphery, are having to cut margins further to respond to low consumer demand. Italy’s is due at 08.45, France at 08.50, Germany at 08.55, and the Eurozone wide measure at 09.00 – all times BST.
The UK number is due at 09.30 and is expected to remain in the mid-to-high 50.0s – strong but not exceptional. Those who are looking for interest rate increases in the UK before year end will be looking for an increase in manufacturing employment and subsequent wage increases in specialised areas. A pick-up in input and output prices would not go amiss either.
