The global stock market recovery continues

June 30, 2016

FX News Today

European Outlook: The global stock market recovery continues as the dust settles over the Brexit shock. There hasn’t been any dramatic central bank action so far and we agree with the ECB that this wasn’t a Lehman moment, but it is clear that at the very least monetary policy will and hopes that at least BoE and BoJ will add further stimulus continue to underpin the recovery on global stock markets. Asian stock markets moved broadly higher overnight and U.K. futures are also up, and with Bund futures already heading south in after hour trade yesterday, core European yields are likely to pick up at least in early trade. The U.K. continues to deal with the domestic fallout of the referendum result but data releases may start to move back into focus more amid a busy calendar that includes preliminary EMU HICP, German labour market data, French consumer spending, the Swiss KOF leading indicator and the final reading of U.K. Q1 GDP. The ECB releases the minutes of the last meeting.

US Bank stress tests: Fed reported 30 of 33 CCAR banks passed without conditions. Deutsche Bank and Santander failed once again, as they did in 2015 (Santander also failed in 2014), due to “broad and substantial weaknesses around their capital planning processes.” Morgan Stanley only passed conditionally and will have to resubmit its plan by the end of the year, or else fail. Also, State Street’s and BONY Mellon’s Tier 1 leverage results were only modestly above the 4.0% minimum standard, at a 4.3% and 4.6%, respectively. BMO’s 4.9% result was also rather tenuous, while its 6.4% Tier 1 capital ratio was only marginally above the 6.0% required. The Fed said capital planning at most banks strengthened versus last year, though many banks reportedly fell short of expectations of adequately identifying risk and establishing internal controls. Meanwhile, a number of banks have already announced plans to boost dividends and buyback shares.

Constancio: ECB must “wait a little bit” on any action. The central bank’s vice president said the the ECB still has monetary policy instruments, but seemed to advocate caution for now, even though he stressed that his comments aren’t mean as recommendations, which leaves the final decision to the wider council. Constancio praised the impact of the ECB’s action so far, while adding that the Eurozone no problems in liquidity and that “Greenspan” was wrong” to say Brexit is another Lehman moment, although he warned that there is the risk that banks could resume deleveraging. More indications that the central bank is essentially sticking to its wait and see stance for now.

Atlanta Fed’s Q2 GDPNow estimate was raised to 2.7% in the latest incarnation from 2.6% previously after the personal income report earlier as follows: “The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the second quarter of 2016 is 2.7 percent on June 29, up from 2.6 percent on June 24. The forecast for second-quarter real consumer spending growth increased from 4.1 percent to 4.3 percent after this morning’s personal income and outlays release from the U.S. Bureau of Economic Analysis. This was partly offset by a decline in the forecast of the second-quarter change in net exports in 2009 dollars from $14 billion to $11 billion after Monday’s advance report on international trade in goods from the U.S. Census Bureau.


Main Macro Events Today

EMU HICP Preliminary June HICP is expected to rise to 0.0% y/y from -0.1% y/y in the previous month, finally lifting the Eurozone’s headline rate out of recession and with the risk to the upside after the clear uptick in German and Spanish HICP rates yesterday. Base effects from oil prices are giving a helping hand, but while the data will likely back the ECB’s wait and see stance, it will be the Brexit fallout that will be decisive for the ECB’s future rate path at the moment. For now central bankers are sitting tight while keeping a close eye on markets, but as the dust settles the ECB may be able to afford to continue to sit on its hands, even though it is clear that in the new European world monetary policy will remain accommodative for longer than previously expected.

Canada GDP We expect April GDP, to rise 0.1% m/m following the 0.2% drop in March. While a return to growth will be welcome news, the widely anticipated plunge in May GDP looms over all the April reports. We see a 0.5% drop in May GDP, driven by the wildfire related shutdown in oil sands production. Real GDP is penciled in for a 1.0% drop in Q2, followed by a 4.0% gain in Q3. The BoC has flagged the projected volatility over Q2 and Q3, while maintaining optimism that growth for the year will be close to what they projected in April.

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