BREXIT polls hit Sterling and Brazil contracts...
Week Commencing Monday 6th June 2016
Overriding Market Themes
UK manufacturing PMI slightly beats expectations, climbing back to growth, but only by a smidgen! There was a marginal improvement in new orders for the month with production broadly unchanged, but export orders declined for a fifth successive month. There was notable weakness in the investment-goods sector and there were strong job cuts in this sector. Overall employment also declined for the fifth successive month, although at a slower pace. The index overall suggests that manufacturing will contract more than 0.5 percent for the second quarter on the ONS methodology and will undermine overall GDP data with the economy remaining dependent on the services sector. As the manufacturing sector accounts for only around 10 percent of UK economic activity, the UK’s near-term growth outlook hinges more crucially on developments in the dominant services sector and Friday’s PMI readings will provide an update. Sterling however remained unimpressed, given current Brexit woes, pushing GBP/USD lower at 1.4430 and 1.27 on GBP/EUR.
In Latin America, Brazil’s economy contracted 5.4 percent in the first quarter from a year earlier, highlighting the extreme challenge facing interim president Michel Temer as he tries to battle the country’s worst recession in more than a century. However, the latest figures will give some hope to Temer, who took power in May after congress initiated impeachment proceedings against President Rousseff, that Latin America’s largest economy is nearing the bottom. The major exporter of oil, agricultural products and raw materials has been hit hard by the global fall in commodity prices. This has precipitated in the national jobless rate soared to a record 11.2 percent between February and April, or a total of 11.4 million people unemployed. With the new President at the helm, and political risk weaning, it seems that the worst could be behind Brazil. If Temer continues to push through the economic reforms he is promising, we may well have the B back in the BRICS in no time!
GBP This Week
GBP weakened last week as average bookmaker dropped the odds of surveyed support for “remain” camp. Given this, we now expect Sterling to trade fluidly across the range as little support or resistance has gathered at key pivot levels.
This week’s political events should gain considerable market attention with Tuesday’s Q&A session on ITV between UK PM David Cameron and UKIP leader Nigel Farage a highlight. Also on Thursday, ITV will host another EU referendum debate with leading UK politicians from the “leave” and “remain” camps advocating their views on Brexit. In terms of data, we expect a relatively quiet week ahead with Aprils Industrial Production figure the only release of note.
USD This Week
In terms of currency expectations, the Greenback should trade on the weaker side given the soft employment and ISM data released last week. With this in mind, expect the Euro and Yen to perform well versus the Dollar. Sterling is a different case, given Brexit, and we expect trading to following polling activity over the course of the week. These assumptions naturally assume Janet Yellen will not give any firm indication of a rate hike.
This week we look forward to Federal Reserve Chair Janet Yellen to speak on monetary policy and the economy. Her speech should point to the potential of a further 1 to 2 hikes for the remainder of the year, with the first hike scheduled somewhere around September. In terms of data, we look for the University of Michigan index to decline modestly on the month, potentially down to 94.0 from 94.7 in May’s print.expecttrading to following polling activity over the course of the week. These assumptions naturally assume Janet Yellen will not give any firm indication of a rate hike.
EUR This Week
We have a relatively slow week in Euro-land! We start with German Industrial Production on Tuesday, which we expect to rise in April to 0.7 percent on the month. This will compliment a smaller than expected decline in monthly German factory orders. Elsewhere we expect Euro area GDP to be confirmed in at 0.5 percent for the quarter.
Given that we have seen the US Federal Reserve push back interest rate hike expectations to September, we expect to see continued EUR/USD near term upside. GBP/EUR will be a more interesting currency to analyse, and should continue to trade in line with Brexit polling results.