Danske Daily: Global Manufacturing Improves, RBA Stayed On Hold

In terms of data releases, the calendar is very thin. In the UK construction PMI data are released at 10:30 CET, while US factory orders at 16:00 CET is the highlight during the afternoon. In the morning, EC President Van Rompuy will participate in the EU parliamentary debate on the latest summit outcome. Tonight Fed’s Dudley will speak on the economy but we do not expect any major news from the event.

In Denmark today brings figures for the foreign exchange reserves in June.

Selected market news
Global manufacturing improves, Chinese data highlight downside risks. Data released yesterday indicated that the manufacturing cycle in Europe is close to stabilising, with the improvement across countries particularly evident in the periphery. In the US yesterday’s ISM report was solid; the headline index rose to 50.9 (previous: 49.0, consensus: 50.5, DB: 50.7) and details were also strong, with healthy increases in new orders and export orders. In Japan the Tankan report indicated improving conditions in the corporate sector but the signals in Asia are generally mixed. In particular, downside risks to the global manufacturing cycle are stemming from China, given yesterday’s disappointing PMI reading.

Chinese money market stress eases further. Money market rates dropped markedly again. The overnight SHIBOR fixing fell 67bp to 3.78% but is still above the 3% level, which we regard as ‘normal’. People’s Bank of China did not inject any liquidity in connection with its open market operations today, on the other hand it did not drain liquidity through its central bill sales.

Portuguese Finance Minister resigns. The departure of Mr. Gaspar was announced yesterday (see Financial Times) and reflects growing public opposition to the government’s tough austerity measures. The surprise resignation comes at a delicate time as the government seeks to build international confidence ahead of the planned bail-out exit in 2014. Nonetheless, the market reaction has been limited.

RBA stayed on hold as widely expected, after delivering 25bp of easing last month. While labour market conditions are soft and although yesterday’s PMI data underscored the downside risks to the Chinese economy, the depreciation of AUD appears to be offsetting some of that risk for now.

Risky assets started the second quarter on a strong footing, buoyed by encouraging EU and US manufacturing data. Market participants may also have taken comfort in the fact that the ISM employment index was not too strong, potentially keeping the Fed from tapering sooner than previously anticipated.

Scandi markets today
Given that EUR/DKK has been relatively stable below the central parity through most of June, we do not expect today’s Danish FX reserve data to show much sign of intervention. Moreover, DKK continues to receive support from foreign demand for Danish assets (see DKK: Danish assets remained popular abroad in May, 1 July) and there seems to be no immediate prospect of a unilateral Danish interest rate hike.

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