·
Talk
is cheap; the price of action is colossal That line, from the play Marat/Sade, pretty much
sums up the European position on Russia. Many government officials have been
talking harshly about the need to penalize Russia for its alleged involvement
in the downing of the Malaysia Air plane over Ukraine, but when push came to
shove, nobody shoved. The EU increased the list of people and companies facing
asset freezes and travel bans, but said they would consider tougher measures
only if Russia doesn’t cooperate in the investigation of the plane. The European
Commission is now expected to publish tomorrow a list of harsher economic and
trade sanctions that the EU could implement if things don’t go well.
·
This may not have been
a great day for standing up for principle, but markets are generally
apolitical. The fact that tensions were lowered switched sentiment from
“risk off” to “risk on.” Stocks in Europe recovered smartly and the rally
carried over into US and Asian equities too, while gold and Bund prices fell.
The risk-sensitive commodity currencies were the best performing G10 currencies
while the safe-haven CHF was the worst.
·
Against what should
have been a favorable background for European assets and hence EUR, it’s
particularly notable that EUR/USD
is opening in Europe below 1.3500 for the first time since 3 Feb
(and even that was only one day; the last time it was down here for any
sustained period of time was last November). The weakness seems to be caused by
the view that European growth has stalled and with the ECB on hold, the only
thing that can rescue Europe is a weaker euro. For example, even while the
IMF declaring that Spain has “turned the corner,” the country’s exports are
falling and the trade deficit is widening out again, endangering the recovery.
We will know more tomorrow when the preliminary PMIs for July are released. The
Eurozone PMIs are forecast to be only a touch weaker, so there seems to me to
be plenty of room for disappointment. Meanwhile, the technical picture for
EUR/USD is also negative (see below). This
could be the break we EUR bears have been waiting for for so long.
·
On
the other hand, EM currencies continue to gain. RUB was the best-performing EM currency of
the ones we track, followed closely by the high-yielding TRY, ZAR and BRL. EM
currencies may be benefitting from the capital flight from Russia as investors
(and locals) pull out of that market and put their money elsewhere. Carry
trades look set to perform well even if “risk off” returns, because of the lack
of contagion to other EM countries.
·
Q2 CPI from Australia
was in line with forecasts at +3.0% yoy, up slightly from +2.9% yoy in Q1. The
news sent AUD sharply higher despite the fact that the headline figure and
“weighted median” were exactly as forecast, because the “trimmed mean” figure
rose faster than expected at 2.9% yoy, up from 2.6% yoy and exceeding estimates
of 2.7% yoy. The higher inflation rate makes it less likely that Australia
might cut rates in the foreseeable future.
·
Today: During the European day, the only data
we get are manufacturing confidence data from France and the preliminary
consumer confidence for Eurozone, both for July.
·
In the UK, the Bank
of England releases the minutes of its latest policy meeting. Recent
comments and speeches by MPC members, plus the minutes of recent meetings,
indicate that at least some members have moved closer to a dissenting vote, but
I doubt that it will come this month. With no outright dissent, the focus will
be on the range of views on spare capacity among MPC members and the debate
about when to start raising rates. Separately, BoE Governor Mark Carney will
speak to a business conference.
·
From the US, we get
the MBA mortgage applications for the week ended on the 18th of July and as
usual no forecast is available.
·
In Canada retail sales
for May are expected to slow to +0.3% yoy from +0.7% yoy in the previous month.
ECB
Executive Board member Peter Praet speaks.
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