Morning Report: 27 August 2015

27th August 2015 By: Ranko Berich

GBP Sterling came under intense pressure yesterday, as the US dollar began to pick up momentum. The euro held up somewhat better than sterling against the dollar, and as a result GBPEUR also fell. As of this morning, a sense of normality has returned to global markets, with UK and European equities looking for a second day of recovery and government bond yields rising steadily. Yesterday did see the release of the Confederation of British Industry’s Realized Sales index, which rose to 24 in August, showing a surprise increase in retail sales. This morning, mortgage lender Nationwide released its House Price Index, which showed prices climbing 0.3% in August, slightly slower than July.

EUR The burst of strength the euro enjoyed in the wake of this week’s turmoil now appears to be fading, as it is increasingly clear that there is (probably) no impending global financial meltdown. Even after a recovery in government bond yields, most front-end eurozone government bonds are yielding returns far below those available in the UK and US. For example, 2 year German schatze are currently returning -0.232%. This means that in order to effectively lend to the German government, one must pay for the privilege. With front end yields still positive in the UK, US, and may other parts of the world, it is unsurprising to see the euro selling off again in the absence of any major risk-off sentiment. Today at 09:00 BST, eurozone Money Supply data will be released.

USD Despite apparently fading chances of a September rate hike, the dollar generally continued to recover yesterday. William Dudley, President of the influential New York Federal Reserve and a permanent voting member of the rate setting Federal Open Markets Committee, appeared to talk down the chances of a September rate hike during a press conference. Dudley said that although the Fed wanted to raise rates this year, a September hike was now less appealing for a variety of reasons, not least of all recent financial and international developments which could affect US employment and inflation prospects. Yesterday’s fundamental data supported the other theme of Dudley’s speech however: that despite everything, the US economy is in fairly good shape. Core Durable Goods Orders rose 0.6% in July, the fourth consecutive month of robust expansion. This bodes rather well for today’s key release: the second reading of Gross Domestic Product Growth in the second quarter. The GDP data will be released at 13:30 BST, accompanied by the GDP Price Index and consumption data.

CAD Riskier assets such as commodities and equities were not gripped by panic yesterday, and as a result the Canadian dollar mounted a slight rally, along with crude oil prices. As of writing WTI crude is back above $40.25, still a level that represents severe distress for the Canadian economy, but the improvement from yesterday is nonetheless a glimmer of hope. Crude Oil Inventories in the United States shrank yesterday by 5.5 million barrels, showing a rapid dissipation in the oversupply that has recently gripped regional crude markets. Today at 13:30 BST, Canadian Corporate Profit data will be released.

UK News

  • FT. Remortgaging hits four-year high: The number of homeowners remortgaging surged last month to its highest level in four years, suggesting borrowers are signing up for attractive deals in case interest rates rise.
  • Reuters. UK annual house price growth lowest since mid-2013: British house prices increased this month at the slowest annual pace in more than two years, a survey from mortgage lender Nationwide showed on Thursday.
  • Reuters. Housing, retail surveys point to strong growth in third quarter: Mortgage approvals in Britain rose to a 17-month high in July and retail sales growth unexpectedly accelerated in August, according to surveys that suggested consumers will continue to drive the economy through the second half of the year.
  • Reuters. UK public’s inflation expectations ease back in August – Citi/YouGov: The British public’s expectations for inflation in the next 12 months fell back this month after hitting an eight-month high during July, according to a survey published on Wednesday.
  • Guardian. UK interest rates on hold until autumn 2016, City predicts: Global stock market turmoil and fears about China raises the prospect of historically low borrowing costs staying in place for longer than expected.