Good morning,
Deutsche keeping equities under pressure
Asian equities have had a torrid overnight session as news surrounding the travails of Deutsche Bank have darkened the mood. News yesterday that some hedge funds were seeking to remove some of their business and exposure from the bank or at least, impose some limits on how much business they are prepared to give to Europe’s largest investment bank.
News elsewhere in Germany from Commerzbank that they were suspending their divided and axing 9,600 jobs will not have helped confidence either. We will have to wait and see what the German government does as the issue now is what this means politically for the Eurozone. Bank bailouts were not popular in 2008 and will be even more unpopular now in an environment of anti-elite, populist politics. Today is finally a day that will allow us to focus on economic news, not Trumpian bluster, OPEC pie-in-the-sky or rumours over Deutsche Bank.
UK data both backward and forward looking
Final GDP numbers for Q2 from both the UK and Germany are due today following a revision higher to the US version yesterday. More importantly for the UK in its post-Brexit landscape is the latest iteration of the Index of Services numbers due. As far as concrete output data goes we have not heard from the UK’s largest sector post-Brexit vote; this is the first opportunity to do so.
Similarly we will get the latest current account data – the level of our trade accounts with the rest of the world – at 09.30. We are in a deficit of around 7.0% of GDP – the worst on record – having not been in a surplus since 1998. Why does this matter?
Simply put if a great deal of your country’s financing and investment is coming from abroad and you import more than you export then you are much more at the whim of foreign economic headwinds. Those could be headwinds from China, Europe, commodities or political instability.
And while a current account deficit in itself is not dangerous, currency market participants will always take it in to account, especially when the proverbial hits the fan. You only have to look at the currencies benefiting from periods of market peril – the euro, Swiss franc and the Japanese yen – to see who are in a current account surplus.
This number is from Q2 but will be able to show us if investment before the vote dipped in any way shape or form.
Inflation creeping into the UK
Similarly we are starting to get anecdotal reports from businesses in the UK that the devaluation of the pound is already leading them to increase prices or re-engineer their product offering in order to protect margins. This was inevitable and while larger companies may be able to withstand the pain for longer, hedges can only last for so long. Those who hedged are finding it tough to either burn through ‘good’ rates to keep prices stable in short term or keep them in reserve in anticipation of further declines in GBP.
I would ask any of our corporate customers to please get in touch with their experiences and expectations of their individual pricing moving forward.
The Day Ahead
US personal income will make the market afternoon a little interesting although month-end flows will likely dominate with a move into USD expected.
Have a great day and a better weekend.