Mixed signals from markets. Pound appreciates (Daily analysis 5.09.2019)

05.09.2019 13:39|Marcin Lipka

Another negative surprise from Germany and microscopic GDP increase in Switzerland. The US and China are returning to trade talks. The pound's appreciation is accelerating despite the enormous uncertainty. The zloty is stable during the early hours of Thursday's trading session.

The most important macro data (CET - Central European Time). Surveys of macro data are based on information from Bloomberg unless noted otherwise.

  • 2:15 p.m.: Change in the number of payrolls in the USA according to ADP data for August (estimates: +148k).
  • 4:00 p.m.: ISM index for the US services sector in August (estimates: 54 points).

Series of negative information

Another set of data from Germany failed to meet expectations. July’s orders in German industry dropped by 5.6% year-on-year. This is the 13th consecutive decrease in annual readings. The scale of the decline in industrial activity is already comparable to what happened in 2011-2013 (the eurozone debt crisis) and during the global slowdown in 2001-2002.

What is also worrying is that declines in production, which first affected primarily capital and intermediate goods, are now shifting to consumer goods. Orders for consumer products in June dropped by 7.5% year-on-year, and in July by 9.7%. The total volume (index) of industrial orders is now only 0.3% higher than the average of 2015. There is a growing risk that these negative trends will also translate into employment. The drop in demand for labour will very quickly worsen consumer confidence index and will have a "second round" effect, which will prevent the German economy from growing (if the announced fiscal impulse is delayed or too weak).

It is little good to say about the readings from Switzerland. The economy in Switzerland grew by 0.2% year-on-year in the Q2. This means that the growth was the second slowest in the last 15 years, except for Q4 2008, which is the time of the global crisis. The data for Q1 2010 were revised downward from 1.7% to 1.0% year-on-year. The most negative impact on the result was caused by the drop in investments - by 1.6%. To some extent, it may be good news for those repaying loans in francs. The Swiss National Bank may fear the effects of further economic slowdown caused by a strong currency and intervene more intensively in the market, weakening CHF.

There is a portion of good news too

Fortunately, there is not only bad news on the market. As we have mentioned, positive reports from Hong Kong can quickly lead to an improvement in relations between the USA and China. That is what has happened. Both sides suggest a return to talks, in September at a lower level and a month later at a higher level. While tariffs are unlikely to be cut for the time being, it is likely that further increases will be halted, which is now enough to improve global sentiment.

In the short term, it is also worth to perceive the events in Great Britain positively. The risk of chaotic leaving the EU on October 31st was reduced after the House of Commons passed a law preventing hard Brexit at the end of next month. However, the next few weeks will be much more nervous regarding this issue.

It is likely that early elections will be held, whether due to a lack of vote of confidence or through the self-dissolution of the House of Commons. The support for conservatives is relatively high - about 10 percentage points of the advantage over the labourists. Moreover, Boris Johnson has a support in the form of the Brexit Party, which after winning the elections to the European Parliament still enjoys the support of a dozen or so percent of the population, and with the Tories' radical approach to Brexit, they can take another few percentage points away from the Farage party, gaining sufficient advantage to govern the future parliament. This would be disastrous news for the pound, even if the deadline for leaving the EU was actually postponed to the end of January 2020.

Calm zloty before data from the US

The overall global sentiment remains relatively good. Investors return to more risky assets after reports of a potential reduction in trading tensions and reduced opportunities for hard Brexit. This also maintains the recent growth of the Polish currency. The EUR/PLN exchange rate remains below the 4.35 level and the USD/PLN rate is close to the 3.90 boundary.

In the afternoon, ISM data from the US services sector will be important. A negative surprise similar in scale to that of industry could probably worsen sentiment and introduce more nervousness. However, the zloty would probably not react to these particularly negative readings, as they would be mitigated by an increase in appetite for deeper-than-expected interest rate cuts by the Fed and pressure on the dollar. In general, the zloty should be stable and maintain the increases of the last few hours.


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