Morning Report: 5 January 2016

5th January 2016 By: Ranko Berich

GBP Yesterday saw an eventful start to 2016 yesterday as Chinese equity markets suffered a major downwards shock which reverberated elsewhere, including sterling which plunged to a nine month low against USD. Research company Markit released its Purchasing Managers’ Index for the Manufacturing sector, showing a slight fall in reported output in December. The Bank of England’s money supply data showed mortgage approvals steady, and Net Lending to Individuals slightly up in December. Today at 09:30 GMT, Construction PMI data will be released.

EUR The euro was on the receiving end of yesterday’s turmoil, and weakened sharply against the US dollar. Yesterday’s fundamental data was mixed, with some strong survey data and weak German inflation. Markit’s Purchasing Managers Indices for a number of eurozone economies showed a very robust level of reported activity growth in the Manufacturing sector. The results were so strong that yesterday was the first time since April 2014 that all of the national PMI surveys recorded growth. German inflation data was less encouraging, with December’s Consumer Price Index down 0.1% month on month. Today at 10:00 GMT, eurozone CPI data will be released.

USD The US dollar looks set to extend its gains from yesterday if this morning’s trends continue: the greenback is up against almost the entire G10, after a strong start to the year. The dollar had actually initially weakened yesterday. The reason for this is that the dollar has a strongly correlated inverse relationship with the oil price, which had begun to strengthen over fears that Saudi Arabia and Iran cutting off diplomatic relations would affect long term supply. However, after the initial fear-driven surge, it became apparent that the diplomatic incident was unlikely to affect oil supply, and prices again fell. Coupled with a selloff in Chinese equity markets, and comments from the Federal Reserve’s John Williams that he was unconcerned about the stuttering Chinese economy and still saw more rate hikes from the Fed this year, the US dollar rallied sharply. We did subsequently see the release of conflicting Manufacturing Purchasing Managers Index data, as Markit’s survey results showed growth in the sector while ISM’s showed deepening contraction, however the market largely ignored this. Today’s data calendar is rather sparse, with only vehicle sales data is expected to be released.

CAD Yesterday’s risk-off sentiment weighed on the loonie, which continued to lose value against USD. The volatility triggered in crude oil prices by diplomatic tensions between Saudi Arabia and Iran also contributed to a choppy day in currency markets, with USDCAD trading heavily influenced by crude. Yesterday’s Manufacturing Purchasing Managers Index from the Royal Bank of Canada showed the surveyed businesses are still seeing declining overall levels of activity, despite the competitive boost Canadian exporters are seeing from the weak loonie. Today at 13:30 GMT, price indices for Raw Materials and Industrial Products will be released.

UK News

  • Reuters. BoE expected to raise rates in Q2; low wage growth, Brexit a risk – Reuters poll: The Bank of England’s first rate increase in more than eight years is likely to come in the second quarter of 2016, as previously expected, bolstered by the Federal Reserve’s decision to raise U.S. rates last month, a Reuters poll found.
  • Reuters. UK economy leans on consumers as manufacturing slips again: Lending to Britons surged towards the end of 2015 at the fastest rate in almost a decade but manufacturing growth slipped, according to figures on Monday that underscored Britain’s reliance on consumers to drive its economy.