The epicenter of the current market turmoil shifts across the Atlantic to the UK on Friday
Today’s podcast
Overview: Old England
- The epicenter of the current market turmoil shifts across the Atlantic to the UK on Friday
- GBP/USD down 3.5% on the day, 2-year gilt yields +63bps
- USD up more than 3% this week, AUD and NZD to new lows of 0.6511, 0.5730
- Mixed ‘flash’ PMI reads, but US still performs better (less badly) than UK, EZ
- Week Ahead in Oz: Retail Sales, Jobs, New Monthly CPI Indicator
- Week Ahead Global: RBNZ, Fed, ECB Spokesman, EZ CPI, US PCE Deflator, China PMIs
- Today: German IFO, Italian election results, Russian “referendums”, Lagarde speaks
Round up data:
S&P Global EZ Manufacturing PMI 48.5 expected from 49.6 and 48.8
S&P Global EZ Services PMI 48.9 from 49.8 and 49.1 expected
S&P Global EZ Composite PMI 48.2 expected from 48.9 and 48.2
S&P Global UK Manufacturing PMI 48.5 expected from 47.3 and 47.5
S&P Global UK Services PMI 49.2 expected from 50.9 and 50.0
S&P Global UK Composite PMI 48.4 expected from 49.6 and 49.0
S&P Global US Manufacturing PMI 51.8 expected from 51.5 and 51.0
S&P Global US Services PMI 49.2 expected from 43.7 and 45.5
S&P Global US Composite PMI 49.3 expected from 44.6 and 46.1
Retail Sales in Canada in July -2.5%m/m vs -2.0% exp.
Canada July Retail Sales ex-auto -3.1% vs -1.0% exp
Old England! It’s evening, The swans are singing, The last Sunday bells are ringing, The wind is sighing in the trees, And old England is dying – The Waterboys
After market volatility for the first four days of last week, caused by multiple central bank decisions and, first of all, FX interventions by the Bank of Japan in 1998, it was the UK’s turn to turn up the volatility wheel on Friday. Whether or not the UK government has announced the biggest tax cut since 1972 – including scrapping the top income tax rate from 45% to 40%, extensive fiscal support for households and businesses to protect them from sky-high energy prices and various red tape cuts – will yielding a significant growth dividend over time is something markets are not yet ready to consider. Instead, they have been consumed by concerns about the extent of the UK government’s near-term funding needs at a time when the current account deficit is over 8% of GDP.
FX Friday & Weekly
GBP/USD shed a cool 3.6% on Friday for a weekly loss of 4.9% to hit a fresh post-1985 low of $1.0840. It is already trading below 1.08 in early trade in Sydney. The record low is $1.0520, recorded in March 1985, a level that some traders will no doubt be eyeing now. AUD/GBP surpassed 0.60 or for the first time since October 2017. And after announcing that the estimated additional £62bn of funding needed in the coming year (totaling £193.9bn) is growing market, 2-year gilt yields rose 63 basis points to 3.8%. Contributing to the rise were money market prices, which required an even more aggressive tightening cycle by the BoE, pushing prices for policy rates up to 5.5% in mid-2023 from 4.9% after the BoE’s 50-point rate hike on Thursday.
The chatter about a potential UK sovereign rating downgrade has already begun. The three main rating agencies currently have the UK at ‘stable’ ratings of AA (S&P), AA3 (Moodys) and AA- (Fitch), so even if one or more decide to give the UK negative ratings bet, watch out , a downgrade decision is unlikely to come until evidence or otherwise of a growth dividend from Friday’s announcements. A story of 2023, not 2022.
Elsewhere in the FX market, broad-based USD strength was the order of the day on Friday, with the DXY index up 1.7% (3.1% on the week to a fresh high after June 2022). This included EURUSD falling to 0.9668 lows after September 2002, AUDUSD hitting 0.6511 lows (weakest since May 20th 2020) and NZDUSD 0.5730 (weakest since May 24th 2020). March 2020).
Stocks Friday & Monday
The incoming economic data was more of a sideshow on Friday, with the main event here being the various ‘flash’ PMIs. In the Eurozone it was again a case for French services to hold the fort, their PMI rising to 53.0 from 51.2 versus below 50 (and mostly lower) readings for French and German manufacturing, German services and both Total Eurozone scores (EZ Composite from 48.9 to 48.2, pretty much the same as UK from 48.9 to 48.4). The US equivalent numbers, which are much less followed than the longer-established ISMs, fared much less poorly, with manufacturing rising to 51.8 from 51.5 and services rising to 49.2 from 43.7. There’s a chance that the upcoming US ISMs will show that the US economy continues to fare significantly better than Europe (or China, for that matter, where we’ll get fresh readings on Friday).
Equity markets around the world fell on Friday to round off a broadly bearish week. Not even the surge in UK exporters’ profits from the sterling crisis could save the FTSE 100 from a 2% loss, although that was slightly less than the Eurostoxx 50’s 2.3% fall. On the week, it’s the higher rate-sensitive NASDAQ that is the worst performer, down 5.1%, followed by the global S&P500, down 4.7%. Incidentally, the Weekend Financial Times’ front-page story is titled “Investors are piling on insurance against further market sell-offs.” four weeks to September 23, according to Options Clearing Corp data analyzed by Sundial Capital Research. The total was the largest dataset on record since 2009 and four times the average since early 2020. Institutional investors spent $9.6 billion in the past week alone.
Bonds Friday & Weekly
In bond markets, it was the belly of the US yield curve that suffered the most last week, the 5-year bond rose 35 basis points, and one factor – and the 10-year yield rose 24 basis points – was the the Bank of Japan’s intervention on Thursday. This believes that if they haven’t already done so, they will need to sell some of their FX reserve holdings to provide the USD needed to sustain an intervention effort. Gilt yields, meanwhile, significantly outpaced the rise in government bond yields and all other global developed market bond markets, with the 10-year yield rising 69 basis points this week. Aussie 10 was up 20 basis points in futures on the week, implying 4 basis points of spread compression versus US Treasury equivalents.
Commodities Friday & Weekly
Finally, in commodities, not a single commodity we track managed an up week as global growth concerns took center stage while central banks turned on monetary tightening controls and the US dollar was rampant, although this was notable for Australia, iron ore and coal were only very slightly declining. Oil has been touted alongside USD strength as perhaps the best barometer of the expected fall in demand, WTI crude down 5.7% on Friday alone, down 7.5% on the week.
Come
- New Zealand has a public holiday in honor of Queen Elizabeth II today.
- Some are focusing this morning on the in-depth results of the weekend’s Italian general election, where markets will be on the lookout for comments from presumptive new Prime Minister Georgia Meloni that they both support already-agreed terms for Italy to increase its stash of EU funds recovery of the next generation and that they remain united with the West in condemning the Russian invasion of Ukraine.
- As a prelude to the week’s data and events, the German IFO survey will draw attention, as will no doubt the OECD’s Preliminary Economic Outlook, both in the early evening Australian Eastern Time. The Ifo business climate score has fallen to 87.0 from 88.5 (weakest since June 2020, at the height of the pandemic).
- This week we will no doubt hear on Tuesday or thereabouts that mock referendums have produced an overwhelming majority of residents in four Ukrainian provinces as part of Russia, leading Russia to view the incursion of Ukrainian forces into those areas as direct attacks on its Sovereignty.
- Data wise, the known highlights are the latest (September) Eurozone inflation data (Friday, Germany Thursday ahead) and US August PCE deflators (Friday). China has official PMIs for both manufacturing and services on Friday, including the Caixin manufacturing version.
- On a local level, August Retail Sales is on Wednesday, August Jobs Thursday and also on Thursday is an ABS media release with information on the new experimental monthly CPI indicators for July and August.
- There will be plenty of central bank speakers from the Fed and ECB, as well as RBNZ Governor Adrian Orr on both Tuesday and Friday.
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