- US ends budget stalemate but little euphoria results as concerns remain fixed on global growth
- EUR likely to remain under pressure if GIIPS spreads fail to re-compress
- US and UK services PMI important for first signs of Q3 performance
Although a stalemate on the US budget finally ended on Tuesday, US equity markets closed more than 2% lower and safe haven flows kept US 10yr Treasuries well supported. Concerns over global growth are taking hold as data is starting to roll over not only in the US, but in Europe and Asia, pushing markets to trade with a risk off bias. With equities taking a hit, the USD gained more meaningful support (‘USD smile’) leaving the USD stronger against all G10 currencies except the other ‘safe haven’ currencies, CHF and JPY.
With the US debt ceiling now resolved, the market is likely to become more consumed with the troubles in Europe. Italian and Spanish bonds spreads continue to widen over Germany. With Italian rates pushing higher, Italian authorities called for emergency talks. Italy remains sensitive to the rise in interest rates as the largest European debtor nation. EURUSD is likely to remain under pressure in recent ranges and we feel the key catalyst for this will be risk premia for key bond markets rising, suggesting levels closer to 1.4000 seem feasible.
As for EURCHF, it continues to make new lows, but the risk of intervention by the SNB could increase if the BoJ intervenes, amplifying even more the CHF’s status as the safe haven currency of choice.
Concerns over global growth are unlikely to abate given the hefty data calendar this week. Following the weaker than expected UK PMI manufacturing, the risk is that the UK PMI Services also shows signs of a slowdown. But with the Services sector comprising almost 70% of the UK economy a lurch towards the 50 boom-bust mark should weigh negatively on GBP since it will breed speculation that the BoE, meeting on Thursday, may engage in a more active discussion of additional QE.
Despite the stronger Q2 GDP numbers, there is no question that the UK economy is increasingly showing signs of weakness. For now, it is gaining ground against EUR and AUD given the troubles in the Eurozone, RBA inaction on Tuesday and diminishing risk appetite – the latter meant SEK and AUD were the worse performers Tuesday. We doubt this will last if QE speculation intensifies.
Now that the US has averted a technical default, economic data will now be closely monitored. Tuesday’s auto sales report showed a decent rise in sales of 5.75% in July indicating that some supply constraints are easing. But Wednesday’s US ISM non-Manufacturing and ADP labour report will be critical as the first indicators for Q3. In addition, the employment index of the US ISM manufacturing is a relatively good indicator for the NFP.
Downside surprise in the two indicators will augment concern over a weak start to Q3, potentially weighing on equities thereby keeping US Treasuries well bid but the USD supported.
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BNP Paribas
Corporate & Investment Banking