- All eyes will be fixed on the EU Summit meeting
- Expectations of a resolution on Greece are high, and so any disappointment will weigh on sentiment
- China HSBC PMI will be released this morning
USD was under pressure as market sentiment improved on signs that there could be some progress out of the EU Summit meeting on Thursday. Speculation was that we could see a comprehensive plan out of the meeting later today. In addition, the head of the EU Commission, Jose Manuel Barroso, said that it was imperative for EU leaders to find a convincing solution to Greece’s debt issues at the summit on Thursday to ease market concerns. With high expectations for the EU summit meeting, there is a risk of disappointment. However, if we do see a resolution, then we would see relief in the GIIPS spreads, a rally in EURCHF, and EUR generally on firmer footing, fostering a general risk-on environment.
While the EU Summit will take centerstage in Europe, Spanish bond auctions later today will be watched. The release of Eurozone Flash PMIs, however, will more or less be a sideshow. We expect the flash PMIs to come in softer than the previous month, following much slower GDP growth from Q2. The core countries should continue to outperform, even though they have lost momentum in recent months. Nevertheless, robust data should provide some confidence in the core economies. The second largest economy will be in focus this morning with the release of the China “flash” HSBC July PMI (a leading indicator for the actual NBS print on 1 August). There is some speculation that the PMI could slip below 50 given the recent slower growth in exports and imports. The last reading (50.10) came close to slipping below the boom bust line. If the PMI does in fact slip below 50, then this would affirm our expectations of selective policy easing in H2. Policymakers have expressed their concern over the impact of monetary policy tightening on the economy.
On the US debt, President Obama said that he could support a short-term increase in the US borrowing limit as long as it is part of a broader deficit reduction deal. Previously, he said that he would veto any short-term extension as the focus is on the long-term extension of the debt limit and significant debt reduction. The announcement comes as the 2 August deadline nears. However, raising the debt ceiling alone will need to be linked to significant budget cuts to appease both the markets and the ratings agencies. There is no question that there have been some positive advances towards an agreement. Support for the bipartisan Gang of Six proposal has gained momentum in recent days, showing Congress’s willingness to come to some sort of an agreement to avoid default.
Also, on the data front, UK retail sales should bounce back in June after contracting 1.4% in May. An upside surprise will help bolster cable. Meanwhile in the US, initial jobless claims are expected to remain above 400k.
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BNP Paribas
Corporate & Investment Banking