The results of last week’s European banking stress tests didn’t really tell us anything new about the problems plaguing the banking sector in Europe, with the Italian banking sector continuing to remain the pressure point in Europe. More importantly they told us nothing about the state of Portugal and Greece’s banks as they were excluded from the tests. Furthermore, somewhat bizarrely given the current levels of interest rates the tests didn’t model for the effects of negative rates on a long term basis, and for these reasons alone they need to be treated with caution and some scepticism.
Even more worryingly, while Italy’s Monte dei Paschi di Siena failed the test completely we are expected to believe that somehow a €5bn recapitalisation will somehow allay concerns that the Italian banking sector isn’t sitting on a volcano of Vesuvius like proportions. While bank management have approved this new recapitalisation plan it would take an extraordinarily brave or foolhardy, take your pick, investor to put money into this festering black hole that has already seen two bailouts come and go. The bank also needs to sell a host of non-performing loans at around 33% of their total value, assuming an accurate assessment can be made on the total value of the loans. It is estimated that the bank currently has about €45bn worth of non-performing loans, while the current market capitalisation of the bank is currently less than €1bn.
Having seen the Bank of Japan follow the Federal Reserve underwhelm with their monetary policy announcements last week, along with disappointing US and EU Q2 GDP numbers, we start August with a renewed focus, not only on the US economy, but also the UK economy, given that this week’s two biggest announcements could well set the tone for the rest of the month.
While we saw equity markets finish July with strong gains across the board, there remains a nagging concern that these gains came in spite of evidence of a softening of economic growth in several important areas of the global economy.
Even though this week’s focus is likely to be on the August Bank of England rate meeting and quarterly inflation report on Thursday, as well as Friday’s July US payrolls report, there is a whole host of other economic data this week could well help shape the market reaction to both of these events.
Starting with China overnight we’ve seen the latest manufacturing PMI numbers for July continue to show little signs of improvement. The official manufacturing PMI deteriorated slightly to come in at 49.9, though rather more encouragingly the Caixin manufacturing numbers showed a slight improvement to come in at 50.6, while services also improved to 53.9.
Japanese manufacturing PMI also contracted with a reading of 49.3.
On the data front today’s attention is likely to be on the latest manufacturing PMI data for July, with a particular focus on the UK number after the disappointing flash PMI number a couple of weeks ago. We saw this fall to 49.1 from 52.1 in June, however there is a chance that we could see this revised higher given that the flash number was taken at a time when political uncertainty was at elevated levels. This is no longer the case and this might be reflected in a slightly improved number.
Before that we will also be getting the latest July manufacturing PMI numbers for Spain, Italy, France and Germany with slowdowns expected for Spain and Italy to 51.6 and 52.2, while France is expected to stay stuck in contraction at 48.6. German manufacturing is expected to show the strongest reading at 53.7.
In the US the latest ISM manufacturing report showed a decent recovery in June to 53.2, and the expectation is that this could well continue into July with a reading of 53.1, which may bode well for this week’s jobs data.
EURUSD – still in a range finding support just below the 1.1000 area, but finding it difficult to rally with any conviction beyond the range highs near 1.1200. To remove the risk of a move towards 1.0825 we need to see a move back above the 1.1250 area.
GBPUSD – continues to hold above trend line support from the lows this year, now at 1.3120 with the potential for further gains through the 1.3300 area and up towards the range highs near 1.3500. A move below 1.3000 would negate, and argue for a return towards 1.2800.
EURGBP – while above the 0.8400 level the risk remains for a move towards the 0.8500 area, and a return to the July peaks at the 0.8600 area. Below the 0.8400 area reopens the support at the 0.8260 area.
USDJPY – continues to track lower and having pushed back below the 103.50 area looks set for a look at the 100.00 level. We need to see a recovery back through the 103.70 area first and then the 105.60 level.
