Market Recap

A risk-on day as the S&P 500 rose to another record high just short of the psychologically important 3,000 level. Asian stock markets were mixed though as investors were asking questions about just how substantive the Trump/Xi talks really were and what progress was really made in settling the trade dispute. Although Trump said a new round of US/China talks was already underway, at the same time the US published a list of $4bn of additional EU goods that the US could slap tariffs on in retaliation for European subsidies to Airbus and other airplane makers. This is on top of a list of $21bn of EU products that’s already been published.

The US economic news was mostly good. The ISM manufacturing PMI was better than expected at 51.7 (51.0 expected) even if it was down from 52.1 the previous month. The employment sub-index picked up, although new orders fell. And even if it was better than expected, it was still the lowest reading since October 2016.

The Eurozone PMIs however were disappointing. The EU-wide manufacturing PMI was revised down by 0.2 point to 47.6. Germany and France were both revised down. Of the 13 EU countries that have manufacturing PMIs, only five are above the 50 “boom or bust” line, which doesn’t bode well for Eurozone economic activity – or the euro.

Nonetheless, the gap between the EU and US manufacturing PMIs is actually getting smaller, so history suggests that this is not necessarily that bad for the euro. At least, it might not be enough to knock EUR/USD out of its incredibly boring trading range.

The UK manufacturing PMI was particularly weak, plunging to 48.0 from 49.4 vs the small rise to 49.5 that had been expected. Most of the components were lower, and Markit noted that “the stranglehold of sustained Brexit-related uncertainty and disruption also weighed heavily on business confidence and employment, as optimism ebbed to one of its lowest levels in the survey history.” The UK manufacturing PMI is now at a level that in the past has been consistent with a cut in the Bank of England’s base lending rate. We’ll have to see if they maintain their tightening bias at their next meeting, scheduled for Aug. 1st. GBP negative

The two-day OPEC+meeting ended yesterday after only one day. As suggested on Sunday, they agreed a nine-month extension of their pact to restrain output by 1.2mn b/d until next March. The meeting dragged on as Iran argued with other members about making the alliance between OPEC and various non-OPEC countries, particularly Russia, permanent. They also failed to make any headway on cutting production further. As a result oil prices fell on the day even though Saudi Arabia confirmed that it wasn’t going to produce all the oil that it was allowed to – it will continue in its traditional role of “swing producer.”

The Reserve Bank of Australia (RBA) cut rates as expected, the second consecutive cut. However, the RBA may have signaled a slowdown in its rate-cutting cycle with a tiny change in the last sentence of the press release, which reads, “The Board will continue to monitor developments in the labour market closely and adjust monetary policy if needed to support sustainable growth in the economy and the achievement of the inflation target over time." (highlight added) The only change to that sentence – indeed, to the entire last paragraph – was the addition of the phrase “if needed.” That suggests a further cut might not be necessary. Nonetheless, the market is still putting 100% odds on another rate cut at the next meeting. I think there’s a chance the probability may be less than that, which would make me bullish on AUD. Let’s hear what Gov. Lowe has to say this evening, also watch the Australian building approvals and trade data out tonight (see below).

Today’s market

After yesterday’s profusion of indicators, today is a paucity.

The UK construction PMI follows yesterday’s disappointing manufacturing PMI. The construction PMI is expected to be up modestly but to remain below the 50 “boom or bust” line. That’s another indication of the weak UK economy.

Overnight, Australia releases its building approvals and trade balance.

Australian building approvals are expected to be unchanged mon, in contrast to the sharp fall in the previous month. Nonetheless that would still leave them sharply lower than the like year-earlier period. Does “no change” qualify as an improvement? I don’t think so. AUD negative

On the other hand, the Australian trade balance, which comes out at the same time, is expected to show a further rise in the trade surplus to a record AUD 5.25bn. I think in an export-led economy like Australia, that’s a more important indicator than building approvals.

In theory, a higher trade surplus should lead to a stronger currency, so the news should be positive for AUD. However, looking at it longer term, it looks to me like the currency determines the trade balance more than the other way around – that a weaker currency often (but not always) results in a higher trade surplus.

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Marshall Gittler

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