GBP slides on Brexit developments, avalanche data from Asia

Summary:

• British pound falls after Theresa May rules out a second Brexit referendum while Michel Barnier expresses his opposition to May’s Brexit trade proposals

• Australian PMIs improve, Q2 inventories beat expectations, retail sales disappoint

• Japanese CAPEX surges in Q2 along with corporate profits

• Donald Trump tweets again, a NAFTA deal has yet to be reached

The beginning of the new month is bringing a slight retreat in the British pound in response to subsequent Brexit developments we were offered over the weekend. First and foremost, PM Theresa May ruled out a possibility to hold a second Brexit referendum. On top of that, the European Union Brexit negotiator Michel Barnier has said that is “strongly opposed” to May’s proposals on future trade advising European automakers that they will have to use fewer British-made parts after Brexit. In an interview to a German newspaper he told “we have a coherent market for goods, services, capital and people - our own ecosystem that has grown over decades. You cannot play with it by picking pieces”. He also added that an exit agreement is about 80% negotiated, and they will be close to the goal if they find “a pragmatic and realistic solution for Northern Ireland”. The GBP is sliding about 0.23% as of 6:42 am BST.

The GBPUSD has fallen to its crucial short-term support coinciding with the upward trend line. Once bulls are able to hold above these levels once could count on a bounce at least toward 1.3045. Source: xStation5

As far as the Asian session is concerned, we have to especially focus on an Australian package of releases. First of all, August’s PMIs managed to improve with CBA PMI rising to 53.2 from 52.4 and AIG PMI surging to 56.7 from 52 in July. Notice that in case of the latter we were offered the 23rd consecutive month of an economic expansion (it means a reading above 50 points). These readings showed that political chaos seen last month had a modest impact on manufactures’ views on the future business. Moreover, we also got the inventories data for the second quarter bringing a decent 0.6% increase in a quarterly basis smashing the median estimate at a 0.2% rise. The data boosts expectations before the Q2 GDP reading this Wednesday, but its impact on overall growth should be quite tepid anyway (the median forecast for Q2 GDP is for quarterly growth of 0.7%, and annual growth of 2.8%). Along with the inventory data company operating profits for the same period were also released showing a 2% QoQ increase and coming in above a 1.3% QoQ expected value. The prior quarter value of 5.9% was revised upwardly to 6.5%. On the other hand, July’s retail sales turned out to be a fly in the ointment cooling expectations for the third quarter. Sales stayed flat in monthly terms falling short of the median estimate of 0.3%. Note that such categories as clothing and footwear led declines with a 2% fall, sales at department stores decreased 1.9%. These drops were offset by increases in food, cafes and restaurants so the structure of the release was not particularly encouraging. The mixed data have resulted in a modest 0.1% increase of the Aussie in early trading on Monday.

From Japan we got a Q2 capital expenditure release showing that CAPEX surged 12.8% YoY while the median estimate had pointed to a 6.5% rise. When software is stripped out the rise was yet more impressive producing a 14% pick-up compared to 7.4% expected. Furthermore, company profits jumped as high as 17.9% in annual terms while sales increased 5.1% - both beats were achieved despite a relatively high base from the previous year. Solid profits may signal that firms have room to lift wages in the months to come which would be undoubtedly welcome by the Bank of Japan. On the flip side, a majority of companies may have chosen to invest in capital rather than labour looking at the Q2 CAPEX data, a step aimed at boosting spare capacity.

On the slightly higher JPY and overall poor sentiment across equities, the Japanese NIKKEI (JAP225) closed 0.7% lower. Technically the index looks as if it would be en route to much lower levels after rejecting the resistance placed at 23100 points. Source: xStation5

Finally, let us notice that deteriorated moods across equities may in part stem from subsequent Donald Trump’s tweets on NAFTA. He wrote that there is no political necessity to keep Canada in the new NAFTA deal. He also reiterated that NAFTA was one of the worst trade deals ever made suggesting that the US would have been better off if NAFTA had been never signed. Talks on NAFTA are expected to continue this week.