Global equity markets retook some ground over the past 24 hours, engendering a risk-positive currency reaction that saw NZD outperform.
EUR suffered as Europe’s headline inflation rate sunk back below zero percent.
From Asia to Europe to the US, benchmark equity indices rebounded from lows close to the levels reached in August’s rout. There does not seem to be any fundamental reasons for the bounce. The paring of recent declines at quarter-end seems the likeliest driver.
Currencies had varied performances against the USD, but very much split along risk-sensitive lines. Emerging market currencies outperformed, along with AUD and NZD. EUR and CHF underperformed.
EUR was already suffering before the inflation data were released, but took another leg lower after the fact. Headline CPI inflation dropped faster than expected to -0.1% y/y, taking the annual rate below zero percent for the first time since March. The surprise was driven by the energy component.
As we noted yesterday, the ECB has recently focussed more on the core measure, which remained steady. But with spare capacity in the euro-zone still ample, there are concerns that core inflation could slip lower. The investor community seems fairly convinced of further easing by the ECB before year-end. With that largely in the price already, it might be hard for EUR to make much meaningful downward progress in the absence of stronger language from the ECB (or, of course, a Fed rate hike).
NZD flitted through 0.64 overnight and remains just underneath that level at present.
In addition, NZD/AUD looks to be solidifying its hold above 0.91. We look for these moves to be extended, albeit modestly. There is serious resistance at 0.6365 in NZD, and 0.9160 in NZD/AUD. The improvement in the ANZ business confidence survey was encouraging, and provided a tailwind for NZD’s gains. We’d warn though that the level of business confidence is still consistent with slowing growth.
Today is dominated by the slew of manufacturing surveys. The local session will be dominated by the two China PMI releases.
Our NAB colleagues in Asia report thin trading conditions ahead of China’s Golden Week holiday, which means that any surprise may see exaggerated price action. That would easily feed into AUD and NZD volatility.
The other highlight for us will be the closely-watched ISM manufacturing index in the US.
Last night’s Chicago PMI was the latest in a series of regional factory indices to materially undershoot expectations, and highlights the directional risk to tonight’s nation-wide ISM reading. Expectations are already lowly at 50.6. A drop below the break-even 50 mark would generate alarmist headlines about the state of the US economy.
If so, keep calm and remember the glamour statistic that will likely be bandied about soon after: that manufacturing makes up just 12% of US GDP, and the tumbling headline unemployment rate means the rest of the economy is more than picking up the slack.
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Raiko Shareef is on the BNZ Research team. All its research is available here.
2 Comments
If so, keep calm and remember the glamour statistic that will likely be bandied about soon after: that manufacturing makes up just 12% of US GDP, and the tumbling headline unemployment rate means the rest of the economy is more than picking up the slack.
I wish some systemically important others would take your advice.
Reposition the Corporate Banking & Securities (CB&S) division by shrinking large, low-yielding asset portfolios such as long-dated, uncleared derivatives and repos, and exiting unprofitable client relationships. Since 2013, CB&S has already exited some businesses (such as commodities and most single name credit derivatives) and deleveraged others. However, we consider it was slower than some European peers to downsize fixed income activity, partly because it hoped to gain market share as rivals retrenched. Net of selective reinvestments in products such as equities, origination, and advisory, Deutsche Bank’s objective under Strategy 2020 was to cut CB&S’ leverage exposure by €130 billion-€150 billion, or about 15%. Read more
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