Australian interest rates on hold
UK retail activity slowed during Olympics
Eurozone debate over bonds flattens euro activity
FX Market Overview
With the US on holiday and little data to ruffle traders’ feathers, the financial markets were relatively quiet yesterday. There were a few data releases though and they were quite telling. UK manufacturing showed some signs of recovery as the Purchasing Managers Index (PMI) climbed to 49.5. That’s not quite above the median 50 level which is the demarcation line between expected contraction and expected growth but traders took it as a sign the British economy might just climb out of recession before the year end and it reinforced the view that the Bank of England will not change interest rates or their QE budget when they meet on Thursday. Sterling was buoyed by the news but overnight news from the British Retail Consortium showing a fall in retail activity in August calmed things. Clearly the Olympics was an immense success for Team GB but it didn’t stimulate high street sales for UK PLC as everyone stayed away from London and stayed home to watch the games. Retailers will undoubtedly be hoping this was a negative of the Olympic effect so it should right itself in September. We get the construction sector PMI today and it is expected to give a similarly positive reading to the manufacturing data so Sterling might well have a positive day after all.
In Europe, we hear that European Central Bank President Mario Draghi is convinced that the buying of three year bonds is not considered ‘state financing’ so it doesn’t break any element of the EU treaty. I love these interpretations of convenience don’t you. He faces a very sceptical audience in Europe though. The Slovakian Deputy Prime Minister has stated that Slovakia is opposed to the ECB buying bonds and very opposed to the notion of Euro Zone bonds and in a survey conducted by the Financial Times and Harris. Only 25% of Germans think Greece should remain within the Eurozone. Chancellor Merkel has a fight on her hands if she is to convince Germans that they should underwrite or approve Mr Draghi’s plans. Aside from all the rhetoric, Eurozone manufacturing data showed a slight improvement in August and we get Eurozone producer prices today which should reflect a slight uptick in input costs.
American traders return to their desks today to be hit with manufacturing, vehicle sales and construction spending data just to shake them out of their relaxed ‘long weekend’ mood. The Dollar is trading in a tight range after last week’s tension over the speech by Fed Chairman Bernanke. As most attention switches to the EU and UK central Banks this week, the Dollar is likely to be driven by investor sentiment. Nervousness still produces USD strength and confidence elicits a wave of USD selling.
Overnight news that the Reserve Bank of Australia left its benchmark interest rate on hold at 3.5% was widely anticipated. The RBA has made it quite clear that it will act to reduce interest rates if the economic data makes it a prudent thing to do but data has been very mixed and the Australian Dollar itself has eased away from its recent exceptionally strong position. That strength was a concern for the RBA because it damages Australia’s export potential. The reaction in the value of the Aussie Dollar has been muted. What is more likely to drive movement in the value of the AUD is news from China, Australia’s major export market. Data from there has been weaker of late, hence the slight fall in the value of the Australian Dollar.
Oh and there is an exceptional review of this report on Amazon written by a chap called John Davidson; five stars and a full recommendation to buy. And before Ian Rankin asks, I have no idea who he is even though his name sounds remarkably like my own. Honest.
I have a Carpe Diem mug and, truthfully, at six in the morning the words do not make me want to seize the day. They make me want to slap a dead poet.