Euro Stocks Stumble

Stocks across Europe slipped in early trade with broad declines seeing the Stoxx 600, DAX and FTSE 100 down around 0.6% on Tuesday morning, whilst the CAC40 dropped 1%, underperformance driven by the luxury weighting which is taking a hit from softer Chinese data. After notching some early gains on Monday there was a steady bleed across equity markets through yesterday afternoon as ECB president Lagarde avoided giving any clue of whether the central bank will raise rates on September 14th. That just seemed to dent sentiment and goes to our view that the ECB won’t know until the day of the meeting whether it’s going to hike or pause – a muddy picture this morning on the EZ data front underlines the predicament facing the ECB. US markets reopen after the Labor Day holiday later with the S&P 500 called down 15pts at 4,500.

Great Walls

Some softer data overnight has taken the shine off the fact developer Country Garden managed to make interest payments on two US dollar bonds before the deadline; avoiding default at the last minute. The China services activity fell to the lowest level in eight months as the Caixin Services PMI slipped to 51.8 in August compared to 54.1 in July. Chinese shares were broadly down on the session and the Hang Seng fell more than 2%.

ECB's Crystal Ball: Muddy Waters or Clear Skies Ahead?

In Europe, Spain’s services PMI meanwhile contracted for the first time since October, adding some further worrying data for the ECB ahead of its meeting later this month. And the final EZ composite reading seems to be worse than the flash – down at 46.7 vs 47.0 on the flash estimate. Meanwhile ECB survey data today shows 3-yr inflation expectations have risen to 2.4%...The data muddies what’s a fine call regards the ECB this month – EUR taking a beating as a result, dropping to a new three-month low this morning.

Expectations for one more hike is pretty split depending on who you talk to. The inflation and economic pictures are kind of muddy. Core inflation edged down to 5.3% in August from 5.5% in July, whilst headline remained steady at 5.3%. The day before this data some sticky Spanish and German inflation figures had seen markets shorten the odds on a hike by the ECB, only for the broader Eurozone data to see yields dip back down. Meanwhile the PMI data is painting a woeful picture for the EZ economy. Eurozone business activity contracted faster in August, according to the latest flash PMI survey data from S&P Global, as the downturn spread further from manufacturing to services. Both sectors of the economy reported falling output and new orders.

The ECB left another hike in September on the table at its last meeting in July. How much have things changed? The economic outlook has hardly improved, but inflation is a shade cooler. Does that mean it’s time to pause? 

Minutes from the July meeting released a few days ago illustrate a bias towards tightening, but that policymakers are probably a bit more mindful of being too hawkish. For instance, policymakers agreed that “in view of the prevailing uncertainties and the large costs of bringing inflation down once it had become entrenched, it was argued that it was preferable to tighten monetary policy further than to not tighten it enough. Before deciding to stop the tightening cycle, the Governing Council needed clearer signs of whether inflation would converge to target once the effects of recent shocks had faded”. In July the ECB was more worried about inflation being too high than anything else – just. But that calculation may have become more balanced, and a pause could be the easier course of action for the central bank. On the other hand – the ECB will be worried about today’s inflation expectations survey.

Sunny Spells for UK Economy; A Chill Down Under

UK data this morning is a bit more encouraging as consumer spending rebounded last month. UK BRC Retail Sales rose 4.1% in August vs 1.5% in July, above the three-month average of 3.6%. Not much relief for sterling however with the dollar bid; GBPUSD testing the Aug 25th lows this morning around 1.2550 which was the weakest for cable since June.

 Peak rates? The Aussie dollar stumbled and fell as the country’s central bank paused its hiking cycle and markets bet the cycle is over. The Reserve Bank of Australia left rates unchanged at 4.10%, which was expected given the recent fall in CPI inflation - and noted in the statement that some further tightening may be required. in his final meeting as governor, Philip Lowe said “Inflation is coming down, the labour market remains strong", adding: “The recent data are consistent with inflation returning to the 2–3 per cent target range over the forecast horizon and with output and employment continuing to grow.”

Commodities Carousel: Gold, Oil, and Those Sneaky Treasuries 

Whilst AUDUSD slid to its lowest level in nearly three weeks after the decision, USD was catching bid across the board with Treasury yields firmer ahead of the US returning later after the Labor Day holiday. The 10yr Treasury advanced to 4.224% overnight, pushing dollar index futures to their best since the start of June.  

Despite the slight wobble through the end of August, DXY is continuing to advance up the trend line and this could have implications for stocks should it persist. If this region now holds then we might look to 105.20 area. 

Elsewhere, gold and oil both steadied after pulling back from last week’s NFP peaks. Copper fell sharply for a second day and silver notched a 5th straight day of losses. Wheat skulked near 2/3-year lows as Turkey’s Erdogan said a Black Sea grain deal could be revived soon.  

Gold trades a tad below the key resistance at $19,42 this morning, with the 50-day at $1,932 offering near-term support should rates start to move higher and drag the dollar up. 

Spot WTI – on the daily (LHS) reversing at the 70 mark on the RSI, MACD still bullish; on the one-hour charts (RHS) we can see the 50-hour SMA being tested this morning.