There is nothing as strange as geopolitics. Yesterday’s markets were catapulted higher as a flash from Ukraine told the world of a “permanent ceasefire” with Russia in the Eastern Donbass region. Before the hour was over, Putin had rejected the idea – how could he agree to a ceasefire without being party to the conflict? As it stands at the time of writing an uneasy truce is in action. Risky assets are moving higher, particularly the currencies and shares of Central European nations that would be next on Putin’s 2014 European tour.
There is no word as yet about the easing, reversal or cancellation of sanctions on the Russian Federation. Any news in favour of this will pave the way for euro gains, as much as the single currency has been hurt by the blowback of trade bans on its goods and services.
Yesterday’s PMI figures from the Eurozone mirrored Monday’s manufacturing numbers by broadly disappointing, with French and Italian industry contracting through August. Slowing growth is continuing although there was little damage to the euro as a result.
Today’s European Central Bank meeting is another in a long line of “most important meeting since X”. The choice Draghi and the remainder of the Executive Council have is to whether to press onwards with monetary policy easing or slip back into a mind-set of just doing enough.
My father was a soldier and taught me a few things about getting in a scrap. One particular memory of mine is being told that no matter how much it hurts, or how tired you are if you have your enemy on the back foot, you do no let up for a second. Keep attacking until there is nothing left to attack. Then have a cup of tea.
Draghi and the ECB’s enemy is falling inflation and while it is too early to say that he has his foe in retreat, continuing the attack is what is needed. Unfortunately this is not in keeping with how the ECB conducts its monetary policy operations and we believe that markets will sit disappointed as a result.
There is a fair range of expectations around today’s meeting. Six of the 49 analysts surveyed by Bloomberg believe that another cut to the ECB’s deposit rate will come today while some are looking for the launch of an Asset Backed Security purchase program that starts the run into sovereign quantitative easing later in the year. Examples of the kind of assets that could be bought by the ECB under an ABS plan would include residential mortgages, small business loans and car loans.
Draghi speaks at 13.30 BST and we look for comments around inflation, future easing and European governments’ fiscal efforts to determine the path of the single currency. We think that the bar is too high today and there is nothing in the magic hat for the euro bears.
Even a strong service sector PMI was not good enough to break the pound higher yesterday. The UK economy now finds itself in a very familiar position – strong service sector growth making up for a lacklustre performance by the manufacturing sector. Chancellor George Osborne has frequently asked for a “March of the Makers” but we are now seeing a “Sprint of the Shoppers” to power the economy onwards. Services have pulled higher on increased business volumes and expectations of future orders, continuing a progression that has provided a strong performance in the sector’s jobs market. Backlogs remain high, suggesting that further recruitment drives are likely. This had no positive effect on sterling, however, and sterling volatility remains close to the highest levels since April this morning.
Today’s Bank of England meeting will, behind closed doors, see both Martin Weale and Ian McCafferty repeat their desire for a higher base rate in opposition to the other seven members of the Monetary Policy Committee. Of course, we will not know whether this is correct until the minutes of the meeting are due in two weeks’ time.
News from the US cannot be ignored today, of course. ADP’s look at the US jobs market at 13.15 is a good precursor to Friday’s important payrolls announcement, while the Services ISM at 15.00 should continue the strength seen in Tuesday’s manufacturing numbers.
Have a great day.