Good morning,
Bookies not backing Brexit
Sterling was relatively quiet yesterday with very little referendum news of note. In fact the most interesting thing that took place was news that the bookmakers William Hill have shortened their odds for a ‘Remain’ vote in the EU Referendum from 4/11 to 1/3, and lengthened ‘Leave’ from 2/1 to 9/4. Markets are unlikely to find optimism or fear in the moves of the bookies but it does suggest a weight of wagers coming in on the UK’s eventual decision to stay part of the EU.
Eurozone back into deflation
With a lack of referendum news for traders to sink their teeth into focus has shifted to the travails of the Eurozone and yesterday’s inflation numbers allowed investors to take the single currency lower. Deflation is back in the Eurozone and with it has come a new wave of expectation that the European Central Bank is going to have to give policy an almighty whack at their latest meeting on March 10th.
While food and energy components were the main laggards core prices, that discount away these volatile areas, also fell to 0.7% – the lowest since April. This suggests to us that the inflationary bump seen in Europe courtesy of the weakness in the euro has started to fade pretty dramatically. It therefore seems obvious that plans from the European Central Bank will emerge to once again weaken the euro.
The problem is of course that we were in a similar situation in December. Then we saw ECB and market expectations dramatically differ on what was seen as effectual and EURUSD ran back above 1.10. Market expectations of what policymakers will eventually do are focused around another interest rate cut to take deposit rates further into negative territory and an additional 10-15bn euros of asset purchases on a monthly basis. A rabbit needs to be pulled from a hat however if you want EURUSD down to parity and a Brexit battled GBPEUR above 1.35.
Aussies hold, China cuts reserve ratios
Overnight news has been busy to a point however the pass through into price action has been rather meek. As predicted the Reserve Bank of Australia held interest rates last night and reiterated recent comments around the headwinds from the global economy and their ability to slow growth.
Despite a cut in the Reserve Requirement Ratio by the People’s Bank of China yesterday, allowing banks to lend out a greater amount of money compared to their reserves, we have not seen a huge reaction in the CNY. Weakness in the yuan followed the announcement but the central bank’s decision to weaken the CNY fix by less than expected this morning has counteracted that news. All in all, it’s much of a muchness and we need something more for opinions on the slowing Chinese economy to change.
Last night’s Chinese manufacturing PMI number will have done little to assuage these fears given it fell to the lowest level in November 2011.
The Day Ahead
With China’s PMI out of the way, we can now drill down into the European and US numbers. Italy’s number is due at 08.45, France at 08.50, Germany at 08.55, and the Eurozone wide measure at 09.00 with the UK number due at 09.30.
We are looking for the European numbers to back up thoughts that inflation is weak and the stronger euro is not helping things. The US number may be afforded some positivity from the warm winter weather, although the strong dollar may drag on export growth.
Manufacturing in the UK is set to remain weak, one has to feel, with weakness in oil production the obvious drag. It will be interesting to see whether the weakness of the pound has started to afford manufacturers a little more comfort.
Have a great day.