Markets:
Over the previous two weeks, the focus of global markets was on the policy decisions and the guidance as provided by the major central banks. In particular, the communication of the ECB and the Fed was of importance. Policy makers both in the US and Europe eased policy further, but showed a big divide on the need for further stimulus. Markets this week could get a first reality check of the data. Today’s EMU September PMI’s provided a hard awakening. EMU PMI’s suggest that the slowdown/contraction the manufacturing sector is ever more affecting the domestic services sector, which had been the stronghold of the economy for now. In Germany, the overall PMI survey dropped into contraction territory (49.1 from 51.7) as the measure of the manufacturing sector (41.4) reached the lowest level since the financial crisis. The German economy is likely heading for a technical recession with negative growth in Q2 and Q3. After the ECB meeting, there was discord whether the latest step of Draghi was appropriate. The data at least suggest that the EMU economy needs a form of stimulus whether it is monetary of fiscal in nature. Investors were unsettled. EMU/German yields nosedived, with curves bull flattening. German yields decline between 2 bp (2-yr) and 7 bps (30-y). European equites succeeded a good rebound earlier this month, but incur losses of more than 1% today. Remarkably, intra-EMU spreads versus Germany narrowed moderately. 10-yr Italian spreads tighten up to 3 bps. EUR/USD (currently 1.0990 area) recently failed to take out 1.1075/1.1110 resistance and today’s data pushed the pair again below the 1.10 barrier. For now, the 1.0925 support stays out of reach. US markets evidently were far less affected by the moves in Europe US yields decline about 4 bps across the curve. NY Fed Williams said that the Fed will closely monitor money market developments, assess its reserves and check when/if to resume with balance sheet growth
UK politics again contains quite some potential event risk for markets this week. The UK Supreme Court will issue a ruling on the prorogation of parliament tomorrow. The outcome could further complicate PM Johnson’s Brexit roadmap. The opposition labour party, which is internally also highly divided on its approach of Brexit, has to formulate its view and strategy at the party congress in Brighton. At the same time, UK PM Johnson will meet other EU leaders on the sidelines at the annual meeting of the UN in New York. It is doubtful whether the Brexit process will be any closer to a constructive solution and the end of this week. Over the previous weeks, investors substantially reduced sterling short exposure as they saw a declining chance of a disorderly Brexit even as the concrete process to this outcome remains highly unclear. After the recent sterling rally, market positioning in sterling has probably become more neutral. So, any further sterling gains without specific positive news on Brexit might become more difficult as the focus will gradually turn to the EU summit on October 17-18. EUR/GBP rebounded north of 0.88 on Friday and is holding above this barrier despite underlying euro weakness. EUR/GBP trades in the 0.8840 area. Cable is drifting back lower in the 1.24 big figure.
News Headlines:
September PMI’s disappointed. Persistent weakness in Germany affects other nations as well. The ECB concludes in an article of its Economic Bulletin that the more recent increase in the negative contribution of domestic factors to euro area industrial production growth is due to lower industrial output in Germany, possibly linked with weaker consumption growth recorded in this country in H2 2019. Details of today’s German PMI’s point to the sharpest decline in business conditions since the global financial crisis. Total inflow of new business is crashing with firms completing orders at a quicker rate than they received them. Weakness in manufacturing is also spreading to domestic services. Job creation across Germany is stalling with price components under pressure from falling demand.
