Market movers today
- Following Prime Minister Boris Johnson's decision to prorogue the UK parliament from mid-September to mid-October, financial markets will monitor very closely any signals from the UK parliamentarians and the likelihood of the opposition getting a no-confidence vote through next week.
- We also keep a close eye on the political negotiations in Italy .
- In the euro area , we get various measures of business confidence, which will provide important clues about how the recent escalation of the trade war in late July and negative market developments have affected business confidence.
- In the Scandi region , there is a couple of important releases, notably Norway mainland GDP, which we expect expanded 0.8% q/q in Q2, and the Swedish NIER's monthly confidence survey. For more details see page two.
- Overnight in Japan , we get the July industrial production data. The manufacturing sector is still the one suffering the most from weaker global demand. PMIs point towards another weak month. On the same day, retail sales tick in. Domestic demand has remained fairly robust, supported by a tight labour market.
Selected market news
Yesterday's big news was that PM Boris Johnson is proroguing parliament , implying that the House of Commons will not sit from mid-September to 14 October . The current parliamentary session started in 2017 and a new Queen's Speech, which marks a new parliamentary session, is long overdue. While Boris Johnson argues that he needs a new Queen's Speech to set out his new government's political agenda, the decision should be seen in the light of Brexit. The prorogation means it becomes more difficult for the politicians to block a no-deal Brexit through legislation, as parliament does not sit (i.e. cannot pass laws). Right now, the easiest way forward for the politicians who want to avoid a no-deal Brexit is to bring the government down in a no-confidence vote. However, this is easier said than done. It is not straightforward for the moderate Conservatives to vote against their own government. The move likely increases the chance of both a no-deal Brexit and a general election. The next important question is whether the positive talks between EU27 and the UK will continue. The House of Commons returns in session on 3 September, so we are heading for a very interesting week ahead of the suspension.
On the trade war , Treasury Secretary Mnuchin has said that the US administration is expecting Chinese officials to visit Washington but would not say whether the planned meetings in Septembers would still take place after the latest escalation. He also said that the US does not intend to intervene in the dollar 'at this time'. White House trade adviser Navarro played down the expectations of a quick solution to the dispute.
Both Fed's Daly and Kaplan were open-minded to further Fed easing due to high uncertainty, slower global growth and low inflation, Fed's Barkin was less convinced. None of them are voting but the Fed seems to lean towards more cuts despite disagreements.
Scandi markets
In Norway, we expect a broad-based increase in mainland GDP of 0.8% q/q in Q2, with strong growth in construction, government demand and manufacturing. This would be well above trend and would mean that capacity utilisation is increasing further. It would also confirm our view that the economy has so far managed to absorb the global slowdown, probably due to high oil investment and government demand.
In Sweden, both retail and consumer confidence have improved in the past couple of months, albeit the latter still remains below average. Given the recent sharp deterioration in labour market data, this improvement appears unsustainable. In general we expect most sectors to decline again in August. In particular, we expect a continuing decline in hiring figures. In manufacturing, we envisage a further decline in export orders. We also expect retail price expectations to recede, even with a weakening SEK.
Fixed income markets
Italian government bond yields continue to move lower on the back of the formation of a new government with PD and 5SM. 10Y Italy is testing the all-time low of 1%, while 30Y Italy is testing the 2%-level. The curve flattener is gaining momentum. Given the significant decline in the funding rates for the Italian government, the pressure from the rating agencies has eased and the risk of a downgrade is declining. Today, the Italian debt office will sell EUR7.25bn in the current 5Y benchmark, a new 10Y benchmark and the 6Y floater. The bulk part of the auction (EUR4bn) will be in the new 10Y benchmark (BTPS 1.35% 09/30).
The Bund and Buxl ASW-spreads continue to decline and we are close to the lows we saw two weeks ago. We expect that it is again the demand for swaps combined with the recent soft German bond auctions. However, the Bund auction yesterday was solid. The bid-to-cover was 1.9, which was close to the last auction in the 10Y Bund.
Today, we expect to see more of the same with a decline in yields and flatter curves. Italian 10Y is expected to test the 1%-level again. The downward pressure got more support from Fed officials supporting more rate cuts as well as from the UK, where the yield of Gilts continues to decline, as the political situation became even more uncertain yesterday.
FX markets
UK PM Johnson’s announcement moved EUR/GBP above 0.91 yesterday. While the move eased a tad during the day, we are likely shifting some probability towards a new election and/or a no-deal scenario and the recent downtrend in EUR/GBP will be halted for now. If we are to resume the rally, we would look for signs of a stronger cooperation between Labour and moderate Tories, in which case we could converge on a mildly GBP-positive scenario with an extension of the October deadline and possibly a new election.
Alternatively, the position between the EU and the UK could soften a lot more than it has. The political developments on Brexit do not warrant a change in our view of EUR/GBP moving around 0.90 on a 1-12M horizon. Crucially, we are not converging on any one particularly GBP-negative or -positive scenario. Our recommendation remains to respect the risk surrounding possible outcomes to consider a high level of hedging against adverse outcomes. Elsewhere in majors, EUR crosses were little moved last night by the news that Italy will soon have a new government in place.
As written in the Scandi section above we expect a solid Norwegian Q2 GDP growth print but as importantly, we will be looking for details on composition and employment growth in evaluating the change in the likelihood of a September Norges Bank rate hike. Our base case remains a hike but due to headwinds from the external environment we prefer a nearterm cautious stance to the NOK.
Key figures and events