So now that the die has been cast
And Boris is PM at last
The window is closing
To set forth composing
A Brexit deal that can be passed
Meanwhile throughout Europe the tale
Shows Draghi is likely to fail
In rekindling growth
While he and Jay both
Find prices their great big White Whale
By the end of the day, Queen Elizabeth II will install Alexander Boris de Pfeffel Johnson as Prime Minister of the United Kingdom. After naming a new cabinet, he will make his first speech and will certainly reiterate that, regardless of the status of negotiations with the EU, the UK will be leaving on October 31. While all of these things had been widely anticipated, their reality sets in motion a potentially turbulent three months. Given the overall weakening growth impulse in the UK economy and the ongoing political intrigue, there is not much to recommend owning the pound right now. Interestingly, however, it is firmer by 0.3% this morning on a combination of a slight uptick in Mortgage Approvals, demonstrating that perhaps the UK housing market is not completely dead, as well as some ‘buy the news’ activity after a prolonged decline in the currency.
Looking ahead, it appears that the only thing that will help rally the pound in any significant manner would be a clear change of heart by the EU regarding reopening negotiations on Brexit. And while, to date, the EU has been adamant that will not occur, one need only look at the continuing slide in the Eurozone economy to recognize that the EU cannot afford a major shock, like a no-deal Brexit, to occur without falling into a continent wide recession.
Which leads to the other key story of the day, the absolutely abysmal Eurozone PMI data that was released earlier this morning. While these are all flash numbers, they paint a very dark picture. For example, German manufacturing PMI fell to 43.1, well below last month’s 45.0 as well as consensus expectations of 45.1. In fact, this was the lowest point since seven years ago during the Eurozone crisis just before Signor Draghi’s famous “whatever it takes” comments. And while the Services number fell only slightly, to 55.4, the Composite result was much worse than expected at 51.4 and pointing toward a real possibility of a technical recession in Germany. French data was similarly downbeat, with Manufacturing falling to 50.0 and the composite weak, with the same being true for the Eurozone data overall.
Given the data, it is no surprise that the euro has edged even lower, down a further 0.1% this morning after a 0.5% decline in yesterday’s session. Interestingly, there are still a large number of pundits who believe that the ECB will stay on the sidelines tomorrow at their meeting, merely laying the groundwork for action in September. However, that continues to be a baffling stance to me, especially when considering that Mario Draghi is still in charge. This is a man who has proven willing, time and again (see: whatever it takes”), to respond quickly to perceived threats to economic stability in the Eurozone. There is no good reason for the ECB to wait in my view. Whether or not the Fed cuts 50 next week (they won’t) is hardly a reason to fiddle while Europe burns. Look for a 10bp cut tomorrow, and perhaps another 10 bps in September along with the announcement for more QE. And don’t be surprised if QE evolves into bank bonds or even equities. Frankly, I think they would be better off writing everyone in the Eurozone a check for €3000 and print €1 trillion that way. At least it would boost consumption to some extent! However, central bankers continue to work with their blinders on and can only see one way to do things, despite the fact that method has proven wholly insufficient.
As to the rest of the market, Aussie PMI data continued to decline, dragging the Aussie dollar down with it. This morning, AUD is lower by 0.35% and back below 0.70 again. With more rate cuts in the offing, I expect it will remain under pressure. Japan, on the other hand saw PMI data stabilize and actually tick higher on the Services front. This is quite a surprise given the ongoing trade ructions between the US and China, themselves and the US and themselves and South Korea. But despite all that, the data proved resilient and, not surprisingly, so did the yen, rallying 0.15% overnight. The thing about the yen is that since the beginning of June it has merely chopped back and forth between 107 and 109. The BOJ’s big concern is that given the relative lack of policy leeway they have as compared to the Fed, that the yen might restart a significant rally, further impairing the BOJ’s efforts at driving inflation in Japan higher. One other thing to remember is that despite the ongoing equity market rally, we have also seen a consistent bid in haven assets. While this dichotomy is highly unusual, it nonetheless implies that there is further room for the yen to appreciate. A move to 105 in the near-term is not out of the question.
But in truth, today’s general theme is lack of movement. The pound is by far the biggest mover, with most other currencies continuing to chop back and forth within 0.1% of yesterday’s closes. It appears that FX traders are awaiting the news from the ECB, the BOJ and the Fed in the next week before deciding what to do. The same is not as true in other markets, where equity bulls continue to rule the roost (corral?) as despite ongoing tepid earnings data, stocks remain bid overall. Bonds, too, are still in demand with Treasury yields hovering just above 2.0%, but more interestingly, Eurozone bonds really rallying. Bunds have fallen to -0.38%, which has helped drag France to -0.11%, but more amazingly, Italy to 1.53% and Greece to 1.97%! That’s right, Greek 10-year yields are lower than US 10-year yields, go figure.
Turning to the data story, yesterday saw the 16th consecutive decline in Existing Home Sales, another -1.7% with New Home Sales (exp 660K) the only data point on today’s docket. The Fed remains in quiet mode which means markets will be all about earnings again today. Some of the bellwether names due to report are AT&T, Boeing and Bank of America. But in the end, FX remains all about monetary policy, and so tomorrow is likely to be far more interesting than the rest of today.