This report will not be updated until Tuesday, August 25 due to vacation time

  • US stock market indices extend their recent rally. The S&P/Nasdaq/Dow all closed yesterday’s session at new highs for the year. Asian stock markets join this move this morning.

  • CRB commodity index spikes sharply higher on global recovery hopes. The oil prices reversed Wednesday’s decline. Brent oil regained the 70 USD/barrel mark.

  • Japan’s jobless rate rose to 5.4% in June, the highest level in more than six years. Japanese core consumer prices drop a record 1.7 % Y/Y in June.

  • New bank lending in Chinese is rumoured to have slowed significantly in July after the steep rise in the first half of the year, according to a news paper article.

  • The IMF urges Europe to step up efforts to clean up the banking sector. The Fund also advices the ECB to exploit any room to cut interest rates further. The euro is seen being overvalued on a range of 0-15%.

  • The president of Lithuania said the country will only look for IMF assistance if the government fails to manage the situation or the international financial markets refuse to lend.

  • The Bank of England yesterday announced it will start with a new Secured Commercial Paper Facility on Monday.

  • UK consumer confidence fails to extend recent rebound in July.

  • Today, the US calendar contains the advanced Q2 GDP figure and the Chicago PMI. In Europe, the EMU flash CPI and unemployment data and Swiss KOF leading indicator are scheduled for release.


Markets

On Thursday, investors shrugged off concerns about asset bubbles in China and sent equities and commodities sharply higher. As a result, all major European and US equity indices set new highs for the year with the S&P coming within striking distance of the 1000 level, while the oil price reversed Wednesday’s drop and moved again above 70 USD/barrel. The positive sentiment and mostly better than expected eco data (see news) had only a limited impact on the bond markets and bonds even moved higher after a well received 7-year Note auction. Strong demand and aggressive bidding in the auction offset recent supply worries sparked by the disappointing 2- and 5-year Note auctions earlier this week.

In a daily perspective, the US yield curve flattened again. 2-year yields moved 0.8 basis points higher, while 10- and 30-year yields fell by respectively 5.1 and 9.6 basis points. In the euro zone, German yields were again little changed, although there was also a slight flattening of the yield curve. In line with the improvement in risk appetite, the intra-EMU sovereign spreads narrowed again.

The currency markets showed again a mixed picture. EUR/USD hardly profited from the improved investor sentiment. The pair even made a brief intra-day dip after publication of an IMF report on the euro area. The IMF estimated the euro being overvalued by 0 – 15%. However, the single currency received a better bid in Asia this morning, regaining the 1.41 barrier. Contrary to what happened in EUR/USD trading, improved risk appetite this time caused the ‘usual’ weakening of the yen against the dollar. USD/JPY settled above the 95 mark. Sterling extended its gains against the euro supported by improved global investor sentiment and better than expected nationwide UK house prices that were published at the start of the session. Overnight, the UK GFK consumer confidence disappointed and this is slowing the rebound of sterling this morning.

Today, the calendar is attractive, both in the euro zone and in the US. In the euro zone, the first estimate of July CPI and the June unemployment rate are scheduled for release. In the US, the first estimate of second quarter GDP and the Chicago PMI (July) are on the agenda.

Last month, euro zone CPI fell into negative territory for the first time since the start of the euro zone. In July, inflation is forecasted to fall deeper into negative territory. The consensus is looking for a figure of -0.4% Y/Y, but the risks are firmly on the downside of expectations after the German, Spanish and Belgian CPI data. In the coming months however, CPI inflation is expected to head back above zero due to reverse base effects as oil prices peaked last year in July. The euro zone unemployment rate is expected to extend its upward trend in June (from 9.5% to 9.7%) and we have no reasons to distance ourselves from the consensus. In the US, GDP is forecasted to have contracted for the fourth consecutive quarter, but the pace of decline might have slowed somewhat. The advance estimate is expected to show a contraction by 1.5% Q/Q (annualized) in the second quarter due to weak consumer spending and investments. We don’t exclude a better than expected outcome as the drags might be partially offset by a narrowing net export deficit and a slower pace of inventory liquidation. The Chicago PMI is expected to rise from 39.9 to 43.0 in July.