Yesterday’s European Central Bank meeting was a lesson in going through the motions for the markets and the assembled press corps. It seemed obvious from the get-go that Mario Draghi wanted a little more time to ascertain the economic impact of the Brexit vote on the UK and Eurozone economies alongside additional economic projections due at the Bank’s September policy meeting. He also sounded like he had a flight to catch.
Stimulus is widely expected by the ECB at its September meeting although we have to countenance what impact it would have. Inflation in the Eurozone is 0.1% against a 2% target and so there is an argument to say the medicine isn’t working.
Can euro fall?
We believe that additional euro weakening is contingent on further QE from the ECB however the already depressed nature of European government debt means that there is little extra room for yields to fall and this will act as a barrier to substantial declines in the single currency.
EUR/USD is almost magnetically attached to the 1.10 level and we will have to see some form of notable deceleration of the economic prospects in the Eurozone for a break lower given the rather marginal effect the recent strong run in US data has had on the cross.
Trump takes the nomination
In the early hours of last night, Donald Trump accepted the Republican Party’s nomination as candidate for President of the United States. It is very strange typing that sentence. November 8th is when the US electorate go to the polls but it is now that we have to start talking about what markets are likely to do in the meantime.
Recent history can help here and there are very many similarities between the election and the UK’s EU referendum:
- One option represents the status quo, the other a radically different approach
- One option has laid out policy ideas, the other has depended on slogans and bluster
- One option is and has been the overwhelming favourite, the other is definitely the outsider according to polls and betting markets
- Immigration is the number one campaign concern
- Both options have large negative opinion ratings
- One option is completely priced in to asset markets, the other represents an almost unpriceable risk
I do not think it is difficult to work out which one is which.
For the moment however, markets are almost 100% pricing in a Hillary win and we are unsure as to how a Trump win would be priced in to asset prices although we would look for USD/JPY to fall with EUR/USD weakness coming along for the ride.
UK to get further post-Brexit sentiment
We have a rare event in the UK today with the publication of preliminary PMIs for the UK economy for the month of July. Preliminary looks at sentiment are normally seen in European PMIs but the clamouring for some semblance of Brexit related news has led to this number being commissioned.
All sectors, manufacturing, services and construction are set to show declines for the month of July and while only 70% of the total surveys are in, a lot will be put on just what kind of economic picture these numbers paint.
They are all due at 09.30.
UK consumer slips in June
Yesterday’s June retail sales summarised things nicely. The UK consumer is a hardy beast but it looks like the beast tightened its belt into and after the Brexit vote with a 0.9% fall in retail spending.
While the majority of this data was taken pre-June 23rd, some wasn’t and this will raise concerns about the UK growth machine moving forward. The UK’s recovery since the Global Financial Crisis has been one of consumption with savings ratios depressed and consumer credit expanding; there is little further to push this bubble however in a landscape where wages are likely to remain depressed and confidence low.”
It will be many months before the true impact, good or bad, of Brexit is felt and expressed in structured data but housing and consumption are feeling chill winds already.