- Very limited action overnight as markets await Fed and ECB meetings
- Stocks in Asia showing small gains on earnings – except China that still trades weak
- Japanese PMI drops further in July
- Focus continues to be on central banks with only tier-2 data released today
Financial markets have been very quiet overnight with most markets trading broadly sideways ahead of the Fed and ECB meetings this week. While there is little expectation of action from the Fed tomorrow, markets are geared up for a decent response from the ECB following president Mario Draghi’s “Believe me, it will be enough” comment last week. Markets are a bit sidelined now, though, as it is unclear how much Draghi can persuade his fellow central bankers in Frankfurt to do. Der Spiegel yesterday wrote about
the divisions inside ECB.
The news flow has been quite limited overnight. Japanese PMI released took a dive to 47.9 in July from 49.9 in June providing yet more evidence that the global industrial cycle is in a downturn currently. At the same time, though, Japanese unemployment fell to 4.3% in June from 4.4% in July.
Equity markets closed broadly flat in the US yesterday and the S&P 500 future has seen small gains in Asian time. Asian stock markets are also higher on anticipation of ECB action and company-related news – see Bloomberg. Chinese stocks are still trading weak, though, as the Shanghai Composite Index hit the lowest level in three years on continued concern over the economy. The improvement seen in other markets has yet to reach China where stocks have kept a negative trend.
US bond yields are unchanged from yesterday when the 10-year yield fell to 1.51%. The 10-year Spanish yield fell another 10bp yesterday to 6.57%. In FX markets EUR/USD has climbed slightly higher overnight to trade just below 1.23. Scandi currencies have been stable overnight after especially SEK strengthened yesterday on very strong GDP data.
Global Daily
Focus today: With mostly tier-2 data on the agenda markets are likely to stay sidelined ahead of the Fed meeting tomorrow and the ECB meeting on Thursday. German and euro unemployment and Euro Flash CPI are set to be released before noon. German unemployment is expected to stay unchanged at 6.8%, the lowest rate in decades. Euro area unemployment should go a nudge higher to 11.2% in June from 11.1%, another high
in the lifetime of the euro. Inflation in the euro area is seen unchanged in July at 2.4%. This afternoon US data on personal spending and core PCE deflator for June will be released. There should be few surprises in the June data as it can be distilled from last week’s Q2 GDP data. The report painted a picture of sluggish consumption growth and limited inflation pressure. US will also release Chicago PMI which is expected to decline slightly to 52.5 in July from 52.9 in June.
Fixed income markets: Following last week’s sell-off safe-haven bond markets showed some tentative signs of stabilisation yesterday. Fixed income and rate markets are expected to continue to trade cautiously ahead of the Fed and ECB meetings. Following Draghi’s bold statements last week, the markets now have high expectations of an ECB intervention and the bar for a positive surprise from the ECB seems relatively high. After the German and Danish bond sell-off last week, even a slight disappointment from the ECB could give way to a new rally in core bond markets later this week. The joker is of course whether the Fed decides to go along with some monetary easing tomorrow, which could make life a bit easier for the ECB in terms of underpinning the recent positive market sentiment. With a light calendar today we do not expect any big moves in the rate markets – at least not until the US ISM and FOMC meeting tomorrow. In the fixed income market the EFSF is printing EUR1.5bn 1.125% 2015 bonds today.
FX markets are in waiting mode ahead of the big central bank events this week but in general we expect the positive sentiment to continue today and with room for new longs in cyclical and commodity currencies AUD, CAD and NZD are expected to continue to perform. If this level is tested strong support is not seen before 8.1750, the 15 June 2000 low. In respect of EUR/USD, German unemployment has the potential to move the cross. Overall we look for upside for EUR/USD ahead of the FOMC and ECB meetings. Even though some short speculative EUR positions were probably taken out last week when EUR/USD jumped 2.5 big figure, there is still a risk of further short-covering. For more on positions see the IMM Update that we published yesterday.
Scandi Daily
In Scandinavia all eyes are on SEK. EUR/SEK dropped 12 big figures yesterday after the much stronger than expected GDP numbers. The market is still able to price out rate cuts in Sweden and further downside for EUR/SEK is expected today. Next strong support for EUR/SEK is seen at 8.2960, the 9/14 August 2000 low.
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