Markets
Today served as a rude awakening for investors. August European PMI’s proved a fierce wake-upcall to those betting that Europe dodged the bullet in terms of economic impact from the 2nd wave of COVID-19 infections. A strong decline in the EMU services index (50.1 from 54.7) erased a large part of the composite PMI’s surge in June (51.6 from 54.9). The manufacturing PMI stabilized around 51.7. Details showed that non-EMU export orders kept manufacturing levels up. A worrying trend is that companies remain cautious when making decisions on employment, again opting to lower staffing levels. Yesterday’s ECB Minutes already showed worries from ECB governors that the situation on the labour market would worsen once fiscal support schemes run-off. German PMI’s showed similar services-driven weakness amid new travel restrictions and a sustained decline in overall employment that undermines domestic demand. French details showed declines in both services and manufacturing. The latter even fell below the 50 boom/bust mark, casting serious doubt over the V-shaped recovery many hoped for. The euro snapped after the PMI release. EUR/USD lost 1 big figure since the release, currently changing hands in the high 1.17-area. European stock markets eventually turned south as well, adding dollar strength to the euro weakness. Main indices lose over 1% currently. Core bonds profited. German yields lose 1 bp to 1.7 bps with the belly of the curve outperforming the wings. Peripheral yield spreads vs Germany rise by 2 bps with Italy (+5 bps) underperforming. The US yield curve bull flattens with yields shedding 0.6 bps (2-yr) to 2.9 bps (30-yr).
EUR/GBP traded below first support (0.8970) thanks to a mix of weak EMU data (see above) and strong UK figures. July retail sales and August PMI’s both beat consensus. Core retail sales rose by 2% M/M, (vs 0.2% expected). The composite PMI rose from 57 to 60.3 with especially services doing the heavy lifting. We’re probably seeing the same effect as we saw in Europe last month, given that the UK eased lockdown restrictions with a one month time lag. Developments since suggest a clawback in September. Nevertheless, it wasn’t until EU chief brexit negotiator said that a brexit agreement seemed unlikely at this stage that EUR/GBP started an intraday comeback. The pair cruised from the 0.8950 area to 0.90 currently. The Barnier comments further dampened the mood on risk as well. He recapped this week discussions as follows: “too often this week it felt as if we were going backwards more than forwards”. He accused the UK of wasting valuable time. GBP/USD returned all of yesterday’s gains, diving from 1.3250 to below 1.31.
News Headlines
Belgian consumer confidence fell for a second month straight from -20 to -26, matching the level seen at the peak of the pandemic in April. Households expressed concerns in particular about unemployment. A gauge measuring unemployment expectations for the next 12 months soared to 77, the highest level on record. Belgian households also expect the economic situation to deteriorate as the series fell sharply to -38 vs. -22 in July (and -47 in April).
Hungary will tighten rules on borders crossings starting September 1st to prevent the spread of the coronavirus as infections are rising in its neighboring countries, PM Orban announced this morning. He also said his government would draft a new two-year plan to boost the economy somewhere mid next month.
UK government debt surpassed £2000 bn for the first time, pushing the debt-to-GDP ratio to more than 100%. That’s the highest level since the sixties. Chancellor of the Exchequer Sunak said the milestone is a reminder that the UK should return to more sustainable finances “over time”. Meanwhile, more borrowing is on the way as the debt office plans to raise an additional 110 bn pound in the next months, bringing the total for the fiscal year to £385 bn.
