Morning Report: 25 August 2015

25th August 2015 By: Ranko Berich

GBP Sterling again fell victim to euro strength yesterday, with GBP/EUR extending its losses, although the pound did manage to gain ground on the US dollar. The FTSE 100 index fell along with other global markets yesterday, losing more than six percent before rallying slightly. The index is looking in better shape this morning, as global markets began to diverge. Chinese indices are continuing to plummet while a semblance of calm begins to return to UK and European equities, perhaps suggesting that yesterday’s turmoil may eventually blow over in global markets.

EUR The euro was the big winner amid yesterday’s chaos, benefitting from capital fleeing losses in emerging markets and from traders readjusting their views on just how big the monetary policy gap will be between Europe and the other developed western economies. At one stage, EUR/USD skyrocketed more than an entire percentage point in the space of 10 minutes. How durable these gains are remains to be seen, as the euro’s attractiveness as a safe haven could recede once the panic from yesterday’s global sell-off subsides. Europe’s equity markets are also looking chipper this morning, with Germany’s DAX and Spain’s IBEX both recovering from yesterday’s carnage. This morning, the final release of German Gross Domestic Product growth in the second quarter showed the economy growing at 0.4%, unchanged from previous estimates.

USD Markets appeared to significantly dial back expectations of rate hikes from the Federal Reserve yesterday, and as a result the dollar weakened against currencies like the euro, sterling, and yen. Amid the ongoing chaos in China and emerging markets, commodity currencies took some massive hits against the dollar, most noticeably AUD and CAD which both sold off dramatically. This morning has already seen some retracement of many of these moves, with EUR/USD falling and AUD clawing back some of its losses. 10 year US treasuries, a bellwether for risk appetite, are once again yielding more than two percent per annum, in a sign that the worst of yesterday’s panic appears to be over for now. Today at 14:00 BST official House Price Index data will be released, followed at 14:45 by research company Markit’s Services Purchasing Managers Index. At 15:00, Consumer Confidence survey results from the Conference Board will be released alongside New Home Sales and the Richmond Manufacturing Index.

CAD Yesterday’s risk-off atmosphere created further large sell-offs in crude oil indices, and as a result CAD once again fell to new lows against USD. This morning a slight recovery has been seen, but the fundamentals of the crude oil market remain weak and further losses cannot be ruled out. Bearish sentiment prevails on commodities in general, and as a result CAD is likely to continue to struggle in the short run.

UK news

  • FT: Osborne warns about UK exposure to Asian markets: George Osborne warned on Monday that Britain’s economy was exposed to a global downturn and its vulnerability reinforced the need to resolve long-standing domestic weaknesses.
  • Daily Mail: UK households £17 a week better off than last year in July thanks to continued lower food and petrol prices: UK households on average had £190 a week to spend on extras in July, £17 more than this time last year, thanks to falling food and petrol prices, new data suggests.
  • Daily Mail: Number of households remortgaging nearly doubles as borrowers shelter themselves from future base rate hikes: There has been a huge surge in remortgaging activity in the last month as homeowners look to shelter themselves from a lurking base rate rise.
  • Reuters: UK advertised starting salaries fall in July: Starting salaries advertised in British job postings fell in July compared with a year ago, according to a survey on Tuesday that adds to tentative signs of a cooling labour market.