Amid a better if not strong risk appetite,
sterling has rallied two cents from yesterday's lows near $1.28 to poke through
the $1.30 level in the European morning. It was helped by an industrial
production report that was better than expected. Industrial and
manufacturing output fell 0.5% in May. This
was around half of the expected
decline after a strong April advance (2.1% and 2.4% respectively).
Separately, Halifax reported a larger than
expected rise in June house prices. On the hand, a measure of business
confidence sunk to a 4.5 year low. That the FTSE 100 is doing well is
not surprising. That index is heavily
weighted to multinationals, and
their foreign earnings are worth more than 10% on sterling's depreciation since
the referendum. However, the FTSE 250, more domestically focused, is
advancing by 1.6% to snap a three-day losing streak.
However, very little has changed. The Tory leadership may narrow to two candidates
today. This would signal the start
of the next phase of the selection process, where party members cast mail-in
ballots with a result expected by early September.
Asian shares were held by the third consecutive loss in the Nikkei (0.6%). The MSCI Asia-Pacific Index rose
0.2%, but the MSCI Emerging Market equity index is up over 1% today.
European bourses are also higher, and the
Dow Jones Stoxx 600 is 1.3% stronger today, led by telecoms, financials, and energy.
Even the beleaguered Italian bank stocks
are trading higher today. The FTSE Italian bank share index is up
nearly 0.8% today, breaking a four-day 10% draw down. Italy is
negotiating with the EC on how it can support its banks, where the post-Brexit
environment, of lower interest rates and likely slower growth, hurt an already weakened sector. The key issue of bailing in subordinated bank bond
holders. Unlike in some other countries, where the bonds are owned by sophisticated institutional investors, in
Italy bank bonds were frequently marketed to retail savers. Wiping out
these savers so to allow using their other money, as taxpayers, is problematic
economically and politically.
At same time, many observers suspect that
Germany soon have to provide assistance to at least one of its lenders. Is it too cynical to expect it to find some extra
leeway in the rules? Separately, following yesterday's poor factory order data (flat vs. expected 1.0%
rise), Germany reported a 1.3% drop in May industrial output. The median
forecast was for a 0.1% decline. While workday adjustments may have
exaggerated the weakness, the takeaway, which the Bundesbank has already
acknowledged is that the German economy slowed in Q2.
It is the New Zealand dollar, not sterling; that is strongest of the major
currencies. It has gained nearly 1% today with
the help of the Deputy Governor of the central bank warning about the dangers
of lower rates. However, the new efforts to curb excesses in the housing
market may still allow rates to be used
for monetary policy purposes. For that, Q2 CPI due July 18 is important. Recall in Q1 CPI rose 0.2% for
a 0.4% year-over-year pace.
The Australian dollar is flat. S&P cut the outlook for
Australia's AAA rating to negative from stable, warning about the growing
fiscal imbalance. Australian bonds showed little reaction. Elsewhere, the
construction PMI jumped to 53.2 from 46.7. The ballot counting continues,
and it is beginning to look that the Lib-Nat coalition may be returned.
Rounding out the dollar-bloc, the
combination of the better risk appetite, and higher oil prices, following news late yesterday that API estimated that
US oil inventories fell (large 6.7 mln barrels) for the seventh consecutive
week, is helping buoy the Canadian dollar. Note that yesterday's trade figures showed 1) oil and
bitumen exports increased despite the Alberta fires; 2) the non-US trade
balance deteriorated to a record deficit, and
3) weak imports from the US and the world warns of soft domestic demand.
The US dollar may find support near CAD1.29.
The US ADP private sector employment
estimate is the main US economic report
today ahead of tomorrow's BLS report. The Bloomberg median call is for
160k after ADP reported 173k gain for
May. There was nothing in the ADP report that prepared investors for the
lowly 38k non-farm payroll print. The employment component of the
service sector ISM jumped to 52.7 from 49.7.
There has been more talk about a recession
in the US, and the flattening of the yield curve at lower absolute levels plays
into such talk. However, the service ISM was
anything but recessionary. The headline rose to 56.5 from 52.9. It
averaged 55.0 in Q2 after 53.8 in Q1. Forward-looking
new orders rose to 59.9 from 54.2, and new export orders rose to 53.0 from 49.0.
Nevertheless, the tone from the FOMC
minutes shows that the confidence of many were
shaken. The concerns were four-fold, and can
only be marginally impacted by the near-term economic reports. First, the
Fed wants to verify that the pace of job creation remains robust. It will
take more than the June employment report to show this. Second, the Fed
wants confirmation that the forward momentum of the economy has not stalled.
This will require greater insight
into the economy's performance in Q3. Third, officials want to be
confidence that inflation will move toward its target. This too may take some time. Fourth, the global challenges,
in particular, the UK and China, continue to need to be assessed.
Disclaimer
Sterling Bounces Two Cents, but Does not Appear Sustainable
Reviewed by Marc Chandler
on
July 07, 2016
Rating:
Reviewed by Marc Chandler
on
July 07, 2016
Rating:
