International trade and German economy (Daily analysis 25.07.2018)

25.07.2018 12:57|Marcin Lipka

Positive sentiment on a broad market. Two sides of the German economy - a boom in construction, but a significantly worse situation in trade and industry. It is difficult to predict the outcome of the EC Head Juncker's visit to Washington. The zloty benefits from good external conditions and is insensitive to the lyre's depreciation.

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

  • Afternoon and evening. Reports regarding the outcome of the meeting between Jean-Claude Juncker, Head of the European Commission, and Donald Trump, the US President.

No fears for now

Strong increases during yesterday's US session, with limited movements in yields on Treasury bonds, were positive for the emerging countries' currencies. The zloty benefited from this and the EUR/USD returned to the 1.17 level. However, it seems that it would be a mistake to expect that global threats have ceased and that the positive economic situation has returned to the eurozone.

Data from Germany indicates that the economic situation is uncertain. According to surveys among entrepreneurs (prepared by Ifo), a boom is taking place in the construction industry. The current economic situation in the sector rose to its highest level ever (almost 50 points; scale from minus 100 to plus 100). Meanwhile, the manufacturing production's condition is much worse, especially its prospects, which are at least two years lows. The situation in retail trade is even worse, where the expectations of entrepreneurs have been the worst in almost 4 years and have fallen below zero (more expect the situation to deteriorate than to improve).

The overall Ifo index, which takes into account both the current and future situation in the main economic sectors, fell to the new 15-month lows (101.7 pts.), which indicates, as the Munich Institute points out, that the German economy is "growing but at a slower pace".

This afternoon, the meeting of President Trump and the European Commission President Juncker should attract the investors' attention. It is extremely difficult to predict the outcome of this meeting, but given the tense situation and social media diplomacy on the US side, it is difficult to expect a breakthrough.

Donald Trump suggests that the agreement is only possible under US conditions. Jean-Claude Juncker, who represents the interests of the EU, will rather want to withdraw the threat of customs duties on European cars. With the White House's aggressive negotiating strategy, it is unlikely that the US President will be the first to take a step backwards. Therefore, the chance for a breakthrough is small.

An escalation of the conflict (until it has negative economic consequences) may foster the strategy building before the US elections in November (the president takes a more aggressive approach and the Republicans' leaders take a milder one). Perhaps Donald Trump does not want to settle the dispute before November (or if only on the terms that will clearly show him as the winner of the negotiating match). Moreover, the idea of helping US farmers (12 billion USD from the federal budget) with hypothetical losses caused by the introduction of customs duties by China has come up in recent hours. This shows that the US is preparing for a longer conflict than for a truce. This may also contribute to a worsening of the sentiment in the following hours.

Zloty benefits from improved sentiment

Growth on foreign markets combined with the absence of dollar appreciation and yields on US Treasury bonds supported the domestic currency. EUR/PLN dropped to the 4.30 boundary. The Turkish lira depreciation did not hamper the zloty either,. The Turkish lira lost 0.03-0.04% of its value yesterday after keeping the interest rates unchanged (the market expected an increase by 1-1.25% to 18.75%-19%) and it also almost met the historical lows.

In the case of the lire and too mild monetary policy as compared to inflation or fiscal policy, the representatives of the central bank and the Ministry of Finance, which is led by President Erdogan's son-in-law, face clear communication problems with the market (e.g. the recent suggestions to increase interest rates have not been implemented). This, in addition to the evident overheating of the local economy and its serious external imbalances, is also damaging confidence in Turkey and lowering the value of lira.

The zloty is relatively strong, but it will be difficult for the euro-zloty to fall below the 4.30 limit, especially in the context of threats to foreign trade. If negative information from the Juncker - Trump meeting arrives in the afternoon, the EUR/PLN may move towards the 4.32-4.33 direction.


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This commentary is not a recommendation within the meaning of Regulation of the Minister of Finance of 19 October 2005. It has been prepared for information purposes only and should not serve as a basis for making any investment decisions. Neither the author nor the publisher can be held liable for investment decisions made on the basis of information contained in this commentary. Copying or duplicating this report without the written permission from Cinkciarz.pl Sp. z o.o is prohibited.

See also:

24 Jul 2018 13:14

Positive sentiment on the market (Afternoon analysis 24.07.2018)

24 Jul 2018 12:42

PMI only in Germany meets expectations (Daily analysis 24.07.2018

23 Jul 2018 15:47

Market awaits for signals (Afternoon analysis 23.07.2018)

23 Jul 2018 12:50

Weaker yuan and zloty (Daily analysis 23.07.2018)

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