We return from the UK bank holiday to find the EU Services Purchasing Managers’ Index (PMI) has reported a benign picture in the bloc. Most prominently, the German Services PMI came in marginally better than anticipated at a healthy 55.8, a mark of clear expansion. It’s also worth zooming out and noting that both the EU aggregate PMI and EU investor sentiment came out better than expected, which is an encouraging sign. Unfortunately, following three successive declines, German factory orders rebounded much less than forecast, and Wednesday’s German Industrial Production number is expected to contract. The manufacturing sector is under extra scrutiny due to the express links to Chinese slow-down fears, and markets are hoping for a moderation of that reading in order to more confidently pronounce prospects for EU growth and stability.
Bottom Line: While we patiently wait to see if German manufacturing has bottomed, growth in the bloc appears to be broadening. However, in the current environment, that doesn’t necessarily translate to tighter monetary policy given the rise in energy prices and the apparent anaemic global growth backdrop.
In a series of tweets on Sunday, President Donald Trump announced that the US will raise tariffs on the import of $200 billion of goods from China, from 10 to 25 percent at 12.01 a.m. on Friday. It has been reported that China wishes to soften the proposed intellectual property rights laws, so this move is viewed as a method of increasing pressure and weakening their resolve. The knock-on effects of this development could be widespread as risk-off sentiment builds, reducing flows of funds into EM currencies in the region. A greater global pullback in equity prices could also be expected from current highs. The Global Times newspaper reported that China was ‘well prepared for other potential outcomes… Including a temporary breakdown in talks’ with the US. However, the difficulty will be whether China can sustain growth levels using only its current stimulus.
Bottom line: Markets did not take Trump’s renewed threats to China lightly; history has proved he’s willing to follow through on his promises despite the ramifications both domestically and globally. Risk-off should dominate until talks resume at the end of this week as China look to negotiate a positive resolution to the current impasse
After reaching near six-week trade-weighted highs on Friday, the Pound has softened over the weekend as the Brexit issue re-enters the frame. Meanwhile, the Dollar has found some support after a strong pullback on Friday. The broad equity sell-off in today’s open is evading a sense of direction, but of the pair, the Dollar appears to have more support.
The longer-term trend has been lower, but we are currently in a phase consisting of mild EUR vs USD appreciation. On the whole, the movement in markets has been narrow, and this pair is no exception. The US-China news has hit equities, but the Dollar hasn’t moved too much where one would expect a flight to safety in US assets. This suggests a short-term move; many participants not reflexively reacting to the overnight news.
Contrary to Sterling’s pullback, the common currency has been trading marginally higher in what is a rapidly compressing trading range. The mix of EU data doesn’t augur a return in EU enthusiasm, but then again neither does UK Brexit jockeying on newspaper headlines. There are broadly flat expectations for this pair.