China Holiday Offers Markets a Reprieve, Waiting for Draghi

The closure of Chinese markets today has removed an agitator and contributed to the calmer tone in the global capital markets.. Sweden's Riksbank's decision to policy on hold has sent the krona up nearly 1% against the US dollar.  It is the big mover.  

On the downside, the Australian dollar is leading the way after a unexpected contraction in retail sales more than offset the narrowing of the trade deficit. The Aussie has broken below a monthly trend line but now needs to close below $0.7000 to confirm the break. The next major technical objective is seen near $0.6000.

The euro area service PMI was a touch better than the flash at 54.4 vs 54.3.  This was driven by Germany and Italy.  Germany's final reading was 54.9 after the flash of 53.6, and is the best since March.  Italy surprised on the upside at 54.6 from 52.0 in July.  The consensus was for 52.5.  

Spain was hardly disappointing at 59.6.  Though it is down slightly from July's 59.7, it as better than the 59.3 consensus expectation.  The disappointment is France, and the divergence between France and German seen in the manufacturing PMI has been duplicated in the non-manufacturing PMI.  France's final reading slumped to 50.6 from the 51.8 flash and 52.0 July reading. 

However, the UK is challenging France for the most disappointing news.  After a disappointing manufacturing PMI (51.5 vs 52.0 consensus), the UK reported a dismal service PMI today.  At 55.6 it is the lowest since May 2013.  The consensus had expected a 57.7 reading after 57.4 in July.  The detail were poor as well, as new orders slumped to a 28-month lows.    The composite stands at 55.1 down from 57.4 in June.   

Sterling was sold to $1.5240, its lowest level since early June.  It has subsequently steadied, but former support near $1.5300 should now act as resistance.  The market's confidence in a UK rate hike has faded not only because of market turmoil, which seems to be the main deterrent to the Federal Reserve, but also because of the deterioration of the UK economy.  

The Fed's Beige Book, prepared the upcoming FOMC meeting, was mostly upbeat, as the economy was expanding in most regions and industries.  Of particular interest was the reference to wage pressures in some regions and selected industries.  The survey was conducted before the market meltdown on August 24.  Tomorrow's employment report is the next key piece of data.  It over shadows today's non-manufacturing ISM and the July trade balance.  

Note that the flash reading of the trade balance was issued in last week.  It showed a $59.1 bln deficit, down from $62.6 bln.  Imports fell 1.6%, while exports edged up 0.4%.  In the popular press, any weakness in exports is attributed to the dollar's strength even though the main culprit appears to be weaker demand.  

We note that polls ahead of the Greek election on September 20 point to another cliff hanger.  One poll showed New Democracy slightly ahead of Syriza (25.3 vs 25), while another polls showed Syriza slightly ahead (23 vs 22.6).   Golden Dawn appears in third place.  The Popular Unity, the newly formed spin-off from the left-wing of Syriza is polling just shy of 4%, while Syriza's former coalition partner is not drawing sufficient support to earn parliamentary representation.  Recall that the way the Greek electoral system works, the winning party get 50 bonus seats in parliament.  The polls show a coalition government is the most likely scenario.  

The ECB meeting follows on the heels of the IMF's report setting the agenda, or at least the discussion points for the G20 meeting that begins tomorrow.  It cautioned that the ECB and BOJ should be ready to easy policy further, while the Fed should hold off from raising rates.   We expect the Draghi to underscore the flexibility of its asset purchase program.  However, it is unreasonable to expect it to commit to extending the program that is to run for another year at this juncture. Increasing the size of the current operation suggested as a possible course of action, but more work is needed to forge a consensus.  The updated staff forecasts, which can trim growth and inflation this year and next, is part of the ground work needed.  

The euro has held above $1.1200.  It is flirting with a trend line drawn off  the August 7 (~$1.0855), August 19 (~$1.1020) and August 31 (~$1.1160) lows.  A break of $1.1200 would signal a test on $1.1140-50.  Also, note that the 20-day average that the euro has not closed below since August 6 comes in just below $1.1210 today. 

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