Danske Research Team
Danske Bank A/S
Market Movers
Focus continues to be on the Emerging Markets rout and the development in commodity prices
Fed's Dennis Lockhart will speak tonight. The subject is pensions and economy and it is unclear from the agenda whether there will be any Q&A. Note that we changed our Fed forecast on Friday and pushed our expectation for lift-off from September to December due to the recent turmoil in Emerging Markets and sharp drop in commodity prices, see Research US: Uncertainty to keep Fed’s finger off the trigger in September.
There are no data of interest on the global front today. Later this week we get US consumer confidence, core PCE inflation and durable goods orders, German Ifo survey, German flash CPI and euro area M3 money supply. A number of Fed and ECB speeches will also get attention to gauge how the two central banks view the current situation ahead of the ECB meeting on 3 September and the Fed meeting on 17 September.
In Scandinavia focus will be on the Danish government’s publication of ‘Economic Survey’ which includes updated economic projections for the Danish economy. For more on Scandi markets see page 2.
Selected Market News
The equity sell-off in Asia continues this morning with Shanghai Composite down 8.45%. Focus is turning to whether the tightly managed Chinese exchange rate is consistent with the government’s macroeconomic goals. A challenge is that the intervention by People’s Bank of China (PBoC) in the FX market reduces liquidity and pushes money market rates higher. Hence, the PBoC might inject more liquidity via other policy instruments such as cutting the reserve requirement ratio in order to reduce the pressure on money market rates and thus support the economy.
The oil price continued lower on Friday and this morning Brent dropped below USD45/bbl. This is even lower than in January and is pushing global inflation expectations lower. The euro 5Y5Y inflation-linked swap rate has declined below 1.65% and the market is speculating in the ECB scaling up its asset purchases. We believe the ECB will stick to verbal intervention as economic data still point to a stronger recovery.
EUR/USD is trading above 1.1450 after having been on a clear upward trend since mid last week. On the back of our changed Fed forecast we now stress that the EUR/USD low is probably behind us and we see the pair trade in the 1.08-1.12 interval on a 3-6M horizon.
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