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Market movers today

  • Asian data released over the weekend showed manufacturing continues to be in a slump. Today, PMIs will draw headlines as releases come across Asia, Latin America and Europe.
  • In the UK, we get the PMI manufacturing and we expect the measure to have dropped further due to weakness in both the global and UK economy.
  • We also have crucial PMI manufacturing releases in Sweden and Norway today (see page 2 for more details) and we expect the Swedish measure to have dropped a lot, while the Norway PMI is expected to have rebounded in August.
  • More generally this week looks like a very interesting one, with several crucial data releases such as the non-farm payrolls on Friday, the Riksbank meeting on Thursday and the possible showdown in the UK parliament between the government and opposition on Brexit (watching out for a possible vote of no confidence in the Johnson government and/or an emergency debate trying to force PM Johnson to ask for an extension if he has not reached an agreement with the EU). Also in focus is news about a possible trade discussion between China and the U.S.

Selected market news

Over the weekend a new round of planned tariff increases in the U.S. and China came into effect, raising the stakes in the trade war and the likelihood of further adverse repercussions on global growth and confidence. While the U.S. imposed a duty of 15% on USD110bn of consumer goods ranging from footwear to apparel and tech products, China commenced with stage one of retaliatory tariffs on USD75bn of U.S. imports. The outlook for the Chinese manufacturing sector already deteriorated in August with the official PMI falling to 49.5 this morning. Given the low prospects for a trade deal, we expect further weakness in manufacturing PMI in the coming months. It remains to be seen whether face-to-face talks between American and Chinese negotiators will still take place in September after the latest escalation round. Asian stocks are in the red this morning along with U.S. equity futures, while the Brent oil price tumbled further below USD59/bbl.

Over the weekend British PM Johnson escalated the civil war in his party, threatening to strip Conservative rebels of their party membership should they fail to back him in a key Brexit vote on Tuesday. The move on balance increases the likelihood of new elections (see Brexit Monitor ). On the other end of the channel, Germany’s ruling parties stemmed a surge by the Eurosceptic AfD party in two important state elections in Brandenburg and Saxony over the weekend. For now, this reduces the risk of a break in Berlin’s grand coalition, at least before the SPD leadership contest at the end of the year.

With less than two weeks until the ECB meeting on 12 September, the August HICP figures revealed that euro area inflation trends are still moving sideways. With headline inflation on a downward trend for months and core inflation stuck just below 1%, the stage is set for policymakers to unveil a comprehensive easing package at the upcoming meeting.

Scandi markets

In Sweden, the August manufacturing PMI is expected to drop to around 50, as German ditto has remained below 45 for six months now and as NIER manufacturing confidence has plunged below the 100 level.

In Norway, the summer has brought mixed signals from manufacturers. While the PMI has fallen sharply and signalled falling activity in July, actual industrial production has very clearly continued to trend upwards. We believe this discrepancy is due partly to oil-related industries being underrepresented in the PMI, with the result that the decline in the PMI is exaggerating the true picture. Seasonal adjustment of the PMI can also be very problematic in July, so we predict a relatively strong rebound to 51.8 in August.

Fixed income markets

The BTP rally ran out of steam on Friday and the 10Y IT-DE widened 2.5bp to 169bp although 10Y BTP stayed below 1%. BTPs came under pressure on Friday as Five Star’s Di Maio threatened with new elections if his demands were not met. However, it seems the government formation is on track and Conte said yesterday that he plans to present key ministers and a government programme to President Mattarella on Tuesday night. In Friday’s Government Bonds Weekly we took a closer look at Italy. We argue that the ‘Salvini premium’ has now been wiped out but that there is still a ‘rating premium’ in the Italian curve and that there is room for compression as we have seen in Portugal in 2019. Hence, we go long 10Y BTP versus Bunds even after the recent rally. We have set a 140bp target for the 10Y IT-DE spread.

This week we will have the last ECB comment before the seven-day silence period kicks in before the 12 September policy meeting. There seems to be consensus forming that ECB should cut rates and the battleground seems to have moved to the QE programme. Last week hawks Weidmann, Knot, Lautenschläger and Holzmann all argued against a new QE programme.

Despite the QE discussion, Bunds remain supported and with the weak China PMI over the weekend and the US-China trade war in focus as tariffs kicked in yesterday we see little possibility of a Bund sell-off this week. That said we have quite a good deal of long-end issuance coming to the market this week as both Spain and France have opted for that part of the curve. France is tapping the 2050 bond and Spain the 2066 bond. In total, an estimated EUR19bn is coming to the EGB market with only a modest EUR2bn in coupons.

FX markets

The tariff war and a slowing global manufacturing sector continue to put pressure on commodities. By extension, broad USD is likely to remain strong.

EUR/USD dropped below 1.10 on Friday. It was an extension of a trend that started in the beginning of the week and can partly be attributed to rising expectations of deeper ECB rate cuts coupled with broad USD appreciation. In addition, month-end and a prolonged US weekend may have supported USD on a broad basis on Friday. EUR/USD could continue to trade with a heavy tone today after Chinese PMIs (published over the weekend) showed continued headwind to manufacturing.

In this morning’s edition of Reading the Markets Norway we argue for our cautiously bullish view on the NOK. The NOK has suffered heavily over the past month amid heavy headwinds from the global environment. A statistical approach would suggest a 14 figure EUR/NOK move lower in September (all else equal) if Norges Bank hikes policy rates by 25bp but with the negative international environment likely set to continue we do not like the risk-reward of a long NOK position at this stage. Indeed, there is a risk that Norges Bank does not deliver the expected hike in which case we could see EUR/NOK move above 10.00 on a more sustained basis.

While EUR/CHF has moved relatively little since the drop late July-early August lingering at the 1.09 mark, it starts to look like a tug of war between SNB and speculators. The latest IMM positioning data (IMM Positioning Update, 1 September 2019) revealed the largest weekly bullish CHF build since June 2017. Meanwhile, sight deposit figures have over the past weeks pointed to significant SNB intervention to fight CHF strength. Overall, CHF positioning is now merely in neutral territory – contrasting with JPY, which is a similar story of a ‘bounded’ central bank – suggesting SNB will continue to be tested on its willingness to protect downside in the cross. Today’s weekly data from the SNB should be scrutinised to sense whether CHF appreciation pressure continued towards the end of last week. EUR/CHF to stay offered ahead of ECB in September but pressure may well abate thereafter.

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Jeffrey Halley

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