After A Week of Euphoria -Monday Blues in FX

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Market Drivers December 16, 2019
China data stabilizes
EU PMI data still shows weakness in PMIs
Nikkei -0.29% Dax 0.57%
UST 10Y 1.844%
Oil $60/bbl
Gold $1475/oz
BTCUSD $7095

Europe and Asia:
EU PMI Manufacturing 45.9 vs. 47.3
EU PMI Services 52.4 vs. 52.0
UK PMI 48.5 vs. 49.3

North America:
USD Flash PMI 9:45

Risk on flows from the US-China phase 1 trade deal continued into the Asia session open today, but as the progressed the dour economic data halted the rally taking both euro and cable off the session highs as European dealing came online.

Over the weekend Chinese economic data showed an uptick in both Industrial Production and Retail Sales provided further support to risk flows with markets hoping that the detente in the trade wars would revive economic growth. However, EU data did not prove to be supportive of the bull case as EZ PMI continued to show weakness in the Manufacturing sector with German PMI printing at 43.4 versus 44.6.

According to Markit “At 50.6 in December, the ‘flash’ IHS Markit Eurozone Composite PMI® remained at that level for a third successive month, running just above the 50.0 no-change level to indicate only very modest growth of output across the manufacturing and service sectors for a fourth consecutive month. The December reading rounds off a fourth-quarter IHS Markit Eurozone PMI and GDP in which output rose at the weakest pace since the economy pulled out of its downturn in the second half of 2013.”

Given the sclerotic growth in core Europe and the lack of any serious policy actions by the ECB the pressure on German officials to expand the fiscal spend will continue to mount. Between the QE buying by the ECB and the budgetary surplus of Germany the imbalance in the supply of bunds has grown to alarming proportions as there is simply very little supply of fixed income instruments on the market. The continuous negative yields in the region would offer German politicians a ready-made excuse to deficit spend without the threat of inflation. The question is whether the German authorities will have the political will to do so. Until then the EZ economy will likely remain mired in a very slow growth cycle and EURUSD upside will be capped.

In the UK the PMI data also missed its mark with both Manufacturing and Services printing below the 50 boom/bust mark. Markit noted, “At 48.5, down from 49.3 in November, the seasonally adjusted IHS Markit / CIPS Flash UK Composite Output Index – which is based on approximately 85% of usual monthly replies – pointed to a modest reduction in overall business activity. Moreover, the rate of decline was the fastest recorded since July 2016.
Survey respondents overwhelmingly attributed lower business activity to a combination of domestic political uncertainty, a lack of clarity in relation to Brexit and subdued global economic conditions. “

The news was not unexpected and cable reacted only with a mild selloff in reaction to the release. The key tell for the UK economy will be next month’s data as it will now have the Brexit uncertainty lifted from the business sector and should presumably produce a rebound.

We sincerely doubt that will happen as caution will likely pervade UK business investment given the lack of an actual deal with EU. As we noted last week a lot will depend on the posture of Mr. Johnson. Will he continue to press a hard line against the EU or given his massive win will he be a lot more pragmatic. For now, the market has adopted a cautious tone, retracing almost all of Mr. Johnson’s post-win euphoric rise with cable trading at 1.3340 in the late morning dealing today. After a few days of risk-on rally, FX markets appear ready for some profit-taking into the start of the week.

Boris Schlossberg
Managing Director

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