Good morning. Global markets are lumbering out of the gate on Monday, following what was a very active day on Friday. Finishing out the week and the month of July, investors were treated to a number of key events last week that so far have not impacted markets as many had believed they would. The Bank of Japan’s announcement of extra stimulus has disappointed some, pushing the yen higher, but a more broad impact was limited. Similarly, weak second quarter GDP figures from the US – 1.2% growth versus 2.0% expected – have had a limited impact on the greenback and European bank stress test results have yielded a muted reaction. The data calendar picks up later this week with another important Bank of England policy meeting on Thursday and American and Canadian employment data out on Friday.
Overnight, sterling was again the big loser, falling on news that UK manufacturing shrank more than forecast in July. Markit Economics’ PMI fell to 48.2 from 49.1 the month prior, its biggest drop in more than three years following the June Brexit referendum vote. The market has positioned itself for at least a 25-basis-point cut by the Bank of England Thursday, after policymakers opted to wait-and-see at last month’s meeting immediately following the Brexit vote. Economic data has disappointed since that last meeting and at this point, it appears the question for the Bank of England is not “if” but rather “when and how much?” The euro continues to charge higher, taking advantageous of the greenback’s latest dip. Similar to the UK, euro-area manufacturing took a dip in July, falling to 52.0 from 52.8 one month prior. On Friday, the European Banking Authority published the outcome of its most recent stress test of 51 lenders. While the results did show banks have come a long way since the first tests in 2014, much work remains to be done. Only one of the 51 banks tested was instructed to raise capital but these tests were the first without a “pass” or “fail” grade. More retrial sales, construction and industrial/manufacturing figures are slated to be released this week which should offer more insight to how the EU has reacted to Brexit.
It was similarly a quiet start for Asian markets, which seemed to digest Friday’s Bank of Japan meeting as well as key China data with relative ease. The Japanese yen has moved markedly higher as the central bank only announced a modest quantity of stimulus, seemingly putting more pressure on the Japanese government to help resuscitate the struggling economy. This will be an important and interesting storyline to watch over the coming weeks and months as some believe the Bank of Japan has officially run out of ammunition. Now three years after BoJ Governor Kuroda’s ambitious call to achieve 2% inflation within two years – the market continues to wait. Late Sunday evening, China released some of its own manufacturing data, which was mixed and received warmly by the markets. The official government reading dipped to 49.9 but the Caixin indicator experienced its best number in a year and a half, coming in at 50.6. The Australia and New Zealand dollars slumped lower, following oil prices which dipped below $41 per barrel but largely undeterred by Chinese data. The Reserve Bank of Australia concludes its latest policy meeting tomorrow and is set to cut rates to 1.50% from 1.75%.
The Canadian dollar is once again losing ground, following other commodity currencies weighed down by oil prices. The Loonie jumped back from psychologically important technical numbers overnight, continuing to lower with crude, which has slipped 1.25% on Monday. It is another very quiet week for Canadian economic data as Friday’s July employment numbers the highlight. It is actually expected that Canadian employers cut 12k jobs last month but we should expect more attention paid to the US non-farm payrolls figure, similarly released Friday. The greenback is modestly higher but is finding any substantial gains a hard sell following Friday’s very weak Q2 GDP figures. While falling crude prices have given the big dollar a boost, it continues to struggle as interest rate hike get pushed out further into 2017. Although July jobs numbers is this week’s highlight, we could experience some elevated volatility beginning this morning as June construction spending and a myriad of July manufacturing PMIs are released. On Wednesday, markets get a peek into the health of the services sector and on Friday, July trade balance hits the tapes with jobs data.
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