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The Early

23 Aug 2019 07:33

Markets: waiting room

European investor sentiment remains fragile as illustrated by the intraday swings yesterday, as the geo-political developments continue to confuse. A slight improvement in the still subdued Eurozone PMIs, a range of interpretations of Chancellor Merkel's latest Brexit comments, and the Bundesbank reportedly playing down calls for Germany to ramp up fiscal stimulus were all in the mix. Banks were boosted by further help from the ECB but the major indices all ended lower, with technology -1.8% and industrials -1.1% the laggards.

The size of sterling's rally was a little puzzling as the Brexit feedback from France and Germany was not obviously different from previous comments. It applied the brakes to the US dollar earners at the top end of the market, with beverages -1.8%, tobacco -1.8% and mining -1.2% all struggling. A day of mid/small cap outperformance was led by oil & gas +1.4% and travel & leisure +1.0%; the value style has enjoyed a slightly better week with revisions and momentum struggling.

Overnight. US market participants are waiting for a steer from Fed Chair Powell later today, but may be disappointed; he will not want to pre-commit to a policy path, especially given the inconclusive US data (including some second-line releases yesterday). Other Fed officials at Jackson Hole are already suggesting that further stimulus is not necessary. US equities were mixed yesterday and volumes remained light. A narrow range of sector moves was headed by financials +0.6% as materials lagged -0.7%. Asian equities were a touch firmer and the European open should follow that lead. The Chinese yuan was fixed at another new 11-year low, but not as weak as traders had expected. Sterling touched a three-week high but has since retreated; oil was little changed.

Early numbers. Dow +0.19%, S&P -0.05%, NASDAQ -0.36%, VIX 16.68; US 10-yr 1.64%; Nikkei +0.36%, Hang Seng +0.44%, Shanghai Comp +0.44%; £=$1.2229, £=€1.1044, Brent $59.97/bbl, Gold $1495.20, FTSE 100 indication +31 (at 6.35 UK).

Macro: slight relief

The ‘flash’ Eurozone PMI readings for August put an end to the run of negative surprises, as all three numbers beat consensus (manufacturing 47.0, services 53.4, composite 51.8) and up on July’s readings. However, a sharp drop in business confidence to its lowest level since May 2013 weighed on job creation; overall GDP growth through Q3 is unlikely to be above +0.2% QoQ. Total new business rose slightly, despite a decline in new export orders, the divergence between a resilient services sector and struggling manufacturing persists. Germany (manufacturing 43.6, services 54.4, composite 51.4) saw a slight pick-up in August, but activity levels remain close to their weakest for six years and the forward-looking indicators suggest another GDP contraction in Q3 is possible. France (manufacturing 51.0, services 53.3, composite 52.7) delivered modest upside surprises for all three readings and is set to extend its outperformance of the broader region into Q3.

The minutes of July’s ECB meeting confirmed that a wide range of stimulus measures was discussed including rate cuts, further asset purchases, a new approach to forward guidance and targeted measures to support the financial institutions. The next meeting is likely to see some of those tools introduced as a package. There was also discussion about whether the existing +2% YoY CPI target should be reviewed, a debate that is likely to continue.

The CBI's Distributive Trades survey has been especially volatile recently and suffered a big relapse in August, as the headline reported sales balance collapsed to -49, the lowest level since December 2008. The commentary suggested that “sentiment is crumbling”, as investment and employment intentions for the year ahead remain subdued. Non-store retailing was the only sub-sector to record an increase in sales with grocers, clothing and hardware & DIY all weak. Expected sales for next month were also lower (net -10).

Today’s events. US July new home sales (3.0) 649k, -0.2% MoM; Fed Chair Powell speech (3.0).

Ian Williams
Economics & Strategy
020 7418 8819

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