Summary:
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European and US indices recover some recent declines
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Der Spiegel report highlights German fiscal stimulus
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US housing starts misses forecasts
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PLN leads recovery amongst EM currencies
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Signs of life in the pound?
Equities were already trading higher on the day before they received a further boost after reports of some fiscal stimulus from Germany. Der Spiegel published an article that suggests the German government is prepared for some deficit spending in case of a recession. Germany has traditionally been one of the most fiscally conservative countries in the EU, but a stimulus package of this sort could be seen as a much needed boost to the bloc’s largest economy. The news sent the Dax up to its highest level of the day with the Euro also gaining while Germand Bunds dropped sharply in falling by one whole handle as yields spiked.
Some 2nd tier data is out this afternoon with the latest housing figures just released and Uni Mich consumer sentiment due at 3PM (BST). In July, US homebuilding fell for the third month in a row due in part to a steep decline in the construction of multi-family units. Housing starts came in at 1.19M vs 1.26M expected, with the prior reading now standing at 1.24M after being revised down from 1.25M.
After another tumultuous week market sentiment improves on Friday and that is felt especially across emerging markets where currencies were under selling pressure. CHFPLN dives by 0.8% and EURPLN by 0.6% as the Polish zloty leads gains across the EM space with ZAR and TRY also advancing.
Sterling is on course to post a solid week of gains as the pound has recovered from recent lows, aided by a series of better than expected economic releases in recent days. Consumer spending, inflation and wage growth all came in above forecasts in the past week and while the importance of economic data remains diminished in the face of ongoing political uncertainty it has no doubt contributed to recovery in the pound.
Looking first at the single currency, there’s been some weakness of late after ECB member Rehn stated the importance of outlining a “significant” and “impactful” stimulus package that overshoots market expectations at the next central bank meeting in September. It’s no secret that the ECB intend to ease policy once more, but these remarks suggest that they are ready to act imminently and in a decisive manner. As far as the pound is concerned talk of a “No Deal” pact between Labour and the Liberal Democrats could be seen as positive, but if truth be told this at present amounts to little more than political posturing.
The more likely cause of the appreciation seen in sterling is a slight alleviation of the doom and gloom that has plagued the currency of late - not so much due to any real positive developments on this front but largely because of the absence of any further negative ones! There’s currently a lot of bad news “baked-in” to the pound and with net short positioning close to its highest level this decade, simply the absence of any further adverse developments could lead to a recovery off the recent lows.
