Strap yourself in for Super Thursday!
Week Commencing Monday 3rd August 2015
Overriding Market Themes
We start this week in China, where the country’s huge industrial base has taken another hit according to official figures. The government’s official PMI index posted 50.0 in July, down from 50.2 the previous month. Any number below 50.0 represents a contraction in the manufacturing sector. Non-governmental sources believe the situation is even worse, with Markit showing PMI dropped to 47.8 in July, the lowest level in 2 years and the fifth consecutive month of sub-50 postings. Subdued factory activity is suggesting that the Chinese economy may be struggling to maintain its momentum. Policymakers have already reduced interest rates, reduced bank capital ratios and accelerated capital projects in a bid to support growth, it appears to little avail. Beijing has set a 7 percent economic growth target for the year, and economists say the government is likely to roll out more economic stimulus measures in the coming months to help meet the benchmark. Given the lack of transparency from the Chinese authorities on economic matters however, it is very difficult to gauge the extent of this slowdown. China remains the engine of emerging market growth, but it does not seem as rosy as it once appeared!
Moving back to Europe now and the Swiss National Bank has reported a first half loss of 50 billion CHF, potentially affecting its ability to pay a dividend this year. Switzerland shocked markets in January when it abandoned its currency peg with the Euro, a move which saw the Swiss franc explode against the Euro by as much as 40 percent at one stage. In fact, the SNB may well be regretting their decision as the continued strength of the franc continues to hurt exports from the country (currently down 2.6 percent this year). Almost all of the reported loss was the result of losses sustained on foreign exchange positions post the de-pegging of the currency.
Finally, the UK economy recovery continued to accelerate after figures showed the economy expanded by 0.7 percent in the three months to the end of June, following growth of 0.4 percent in the first three months of 2015. The expansion in the second quarter was driven by the UK’s dominant services sector, which grew itself by 0.7 percent in the second quarter. Industrial Production, which accounts for roughly 15 percent of total UK economic output, increased by 1 percent. Tuesday’s figures mean that the economy is now 5.2 percent larger than its pre-crisis levels, and hopefully shows that the disappointing levels of growth in the first quarter was just a “blip”.
GBP This Week
Owing to a change in the way the Bank of England reports, this Thursday is set to be the release of the month. In what is being coined as “Super Thursday” the Bank of England will overhaul its communications and release simultaneously the MPC decision, the minutes of the same meeting and its August inflation report. This is a lot of information for markets to digest, and we expect Sterling volatility to edge higher on the back of it, especially given we may well see a return of 1 or 2 hawks into the fold! Our baseline estimates are for a 8-1 split vote, with Martin Weale the most likely candidate to vote for a rate hike. It is entirely possible that either David Miles or Kristin Forbes may also vote for a hike too.
Given the current state of the economy, we do believe that it will take at least a further 6 months before a majority will vote for a rate hike, however as per usual any shift towards a hike will give the Sterling bulls something to buy. With this in mind, we expect Sterling to have a pretty solid week, perhaps pushing back towards and over the 1.43 level on GBP/EUR and testing the 1.5750’s on Cable.
USD This Week
As the Federal Reserve continues in its data dependent mode, this week’s employment report on Friday should take the limelight. We expect the headline Non-Farms to increase by 222k while unemployment should remain unchanged at 5.3 percent. Manufacturing and services ISM should help confirm moderate growth around 2 percent annualised. Given the relatively bullish expectations on these releases, we do think there is some scope for further USD gains in the week ahead, especially given the selloff we saw on Friday.
EUR This Week
We have a reasonably light week on the European side, with markets more likely to concentrate on the IMF’s latest sabre-rattling surrounding a potential 3rd bailout for Greece. We expect the final reading of European PMI’s to remain broadly unchanged on Wednesday, while Italian IP may possibly contract by as much as 0.5 percent on the month after rising sharply last month.
All in all, we expect the combination of QE and Greece woes to continue to subdue the Euro, allowing both Sterling and the Dollar to continue to gain some ground against the single currency.