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Deutsche Bank Early Morning Reid – July 26, 2018

After yesterday’s Olympic breakfast travel and weather report in the EMR, today Olympic fever builds here in the city as the torch parades through the square mile this morning. Its quite ironic that London hosted the 1948 so called “Austerity Games” and is now hosting again in a recession built out of austerity with the UK releasing a third successive negative GDP quarter yesterday and one much worst than expected (-0.7% vs -0.2% QoQ consensus). We’ll see how much austerity there is in tomorrow’s opening ceremony. If they really wanted cut backs they could have asked my band to play! My obviously well connected assistant Elizma went to see the dress rehearsal two nights ago and has shown us all a preview on her camera phone. It looks good. So hopefully London does us proud.

A few weeks ago many were suggesting that markets would grind to a halt during the Olympics but with the Fed and ECB meetings, and with ISM/PMIs and payrolls next week, the beach volleyball may need to take second fiddle. Indeed yesterday’s poor open (Spain spiked above 7% in 2 years) was turned by comments from the ECB’s Ewald Nowotny that there were arguments in favour of
giving the ESM a banking licence. Spain’s 2yr bond yield closed 73bp off its intraday highs at 6.421%.

Nowotny did qualify his comments by saying that there were also other arguments (against such a move) and he sees this as an ongoing discussion. He also added that he was unaware of specific discussions within the ECB. Clearly this would be positive for markets if it happens as it would increase the firepower of the ESM and circumnavigate the need for ESM to pre-fund. In reality though the legal and political hurdles are high. For a start we have doubts about the Bundesbank’s willingness to discuss it. Indeed the Buba’s Weidmann said a few weeks ago that Germany remains firmly opposed to giving the EFSF and the ESM a banking license and he regard that as monetary financing. On the legal side, our fixed income research colleagues reminded us of an ECB legal opinion published
in May last year which noted that the ESM would not be allowed to become a counterparty of the Eurosystem under the current arrangement. So the idea looks a non-starter but it perhaps reminded the market that there is an ECB meeting next week which could provide something to help the beleaguered peripherals. Spanish and Italian equities ended +0.82% and +1.17% higher but off their
intraday highs as the positive momentum faded into the close.

Moving on to the US the S&P 500 had an up and down day but closed virtually flat at -0.03%. Overall the session benefited from some decent company earnings which helped offset Apple’s previous night miss and a sharp decline in New home sales (-8.4% v +0.7% expected). The IT sector (-0.80%) was the main laggard as Apple shares closed the day 4.3% lower. The NY Times also ran an article on QE hopes which followed on from Hilsenrath’s earlier WSJ piece.

As we said yesterday the market is probably starting to price in the possibility for next week and Gold jumped +1.5% to close above $1600/oz for the first time in about 3 weeks. Those lucky Olympic winners!!

Despite a subdued finish to the US session, Asian equity markets are modestly higher overnight. The Nikkei, Shanghai Composite and the KOSPI are all around two to three tenths of a percent higher as we type. Brent and Copper are a little bit softer after a solid session
yesterday. In soft commodities, Corn and Wheat prices are also softer and off their recent highs but they are still about 16% and 20% higher this month. On China, an IMF official said that the government will probably maintain the “status quo” as far as monetary and fiscal policy goes. Interestingly the press are attributing to the firmer tone in Asia to higher Fed easing hopes on the weaker housing data yesterday.

At the beginning of the week we highlighted that for the authorities to act next week the data this week would have to be fairly bad to provoke a response. Whilst the PMIs were weak they were more or less in line with consensus. Yesterday’s ECB lending survey was perhaps similar. Take corporate loans for example, the net percentage of banks reporting a tightening in lending standards was +10% in Q2, virtually unchanged from the +9% in Q1. Let’s see if today’s M3 credit report will make any difference provide any more ammunition for the liquidity seekers.

As we said yesterday a lack of Central Bank action next week would likely lead to a dangerous August for the market and on this theme we came across an interesting Bloomberg article which summarised various EU leaders’ holiday plans for us. The German Finance Minister Schaeuble is off for a 3 week vacation after having said that Spanish bonds were at the wrong price yesterday. Mrs Merkel has also left Berlin for her usual two-to-three week holiday. Mr. Hollande will remain in France but will be in the south. The Belgian PM will
head to Italy next month and the Portuguese PM will be on holiday in the first two weeks of August but will stay domestic. Mr. Monti now plans to take a week in the middle of August. Interestingly Spain’s PM currently has no vacation plans set up and Greece’s PM Samaras is not planning any time off. A Greek government spokesman yesterday said “no one is going away on holiday…and the ministers should be at their offices from very early in the morning.”

For today the M3 report will be the main European economic release alongside Italian retail sales. In the US we have durable goods, initial jobless claims and pending home sales. In terms of bond sales Italy plans to issue up to EU2.5bn in zero 2014 bonds at 10am London time. We have over 120 companies reporting today from both sides of the Atlantic and Facebook’s result will be one of the highlights.

Jim Reid

Colin Tan, CFA
Research Analyst

Deutsche Bank