Rally on stock markets didn't last long

September 30, 2016

European Outlook: The rally on stock markets didn’t last long and while most European markets still managed to close with gains yesterday, Deutsche Bank (down 7% at one point yesterday) concerns dragged the DAX lower and are also overshadowing markets elsewhere. Wall Street closed with losses and in Asia, lenders were also under pressure, with Nikkei and Hang Seng down more than 1.4% and only mainland Chinese markets managing to carve out gains. U.S. and U.K. stock futures are also down as the pressure on Deutsche Bank is building with the sell off in shares of course only adding to the problem and creating a viscous circle. European markets have opened down 1%. Oil prices meanwhile are down on the day, but remain above USD 47 per barrel following the OPEC deal and Gold traded under USD 1316 before recovering to $1323. Released overnight U.K. GfK consumer confidence came in better than expected and improved to -1 to -7 in the previous month. In a speech by Mr. Kuroda to the Japanese parliament he explained that the BOJ are internally debating exit strategy from ultra-easy policy but speaking specifically about those means too hastily could cause confusion in markets. The calendar also has German retail sales at the start of the session, French consumer spending and the final reading of U.K. Q2 GDP as well as Eurozone unemployment. The focus, however, will likely be on Eurozone inflation data for September, which is expected to tick higher on base effects.

German retail sales dropped -0.4% m/m in August, while July was revised markedly down to 0.5% m/m from 1.7% m/m reported initially. The annual rate still jumped to 3.7% y/y after falling in July. The three months trend rate also improved. Consumer confidence remains at very high levels and the Ifo index also reported an rise in retail sentiment, but official retail sales, while highly volatile and subject to heavy revisions, only cover part of overall consumption, and the data have only limited bearing for overall consumption trends, which still look solid.

ECBspeak: Visco: QE could last beyond March 2017. The Italian central bank governor hinted that the QE program could be extended beyond the current timeframe to impact inflation and that the inflation may have to be temporarily overshot. At the same time he stressed that QE makes reforms easier not harder and that in Italy, high debt not EU rules are is weighing on budget policies. It is true of course that the ECB’s low interest rate policy is giving governments more room to manoeuvre and thus should make it easier to implement reforms, at the same time though, the low rates also gloss over existing problems and make it a less pressing need for governments to reduce deficits and debt, as the ECB’s program is keeping rates low and reduces market pressure on governments.

Fedspeak: Minneapolis Fed’s Kashkari saw no alarm bells that a recession is imminent and no urgency in raising rates with inflation low, but by the same token waiting too long on raising rates was less of a risk that hiking too soon. In any case, if inflation does rise, the Fed has all the tools it needs to bottle it up. He also said that the Fed is not out of ammunition if the economy is hit by recession and concurred that politics is not factoring in at all to Fed decisions. About par from moderate course from Kashkari.

Main Macro Events Today        

EMU September Inflation – EMU Sep HICP inflation expected to rise to 0.4% y/y from 0.2% y/y in the previous month, with less negative base effects from energy prices the main driving factor behind the expected uptick. This was already reflected in German and Spanish numbers yesterday but while base effects are lifting the annual rate, readings still remain far below the ECB’s 2% limit for price stability. So while the risk of a deflationary spiral is becoming ever more remote, the data will do little to stop the ECB from continuing with its current expansionary policy stance.

Canada July GDP – Expected to grow 0.3% in July after the 0.6% surge in June that followed the 0.6% plunge in May. Mining, oil and gas production is on track to add to GDP growth, and this could provide an upside surprise. While energy exports values slipped 0.8% in July, prices contracted as the IPPI for energy and petroleum products fell 3.5% m/m. Meanwhile, the manufacturing report’s 2.5% gain in petro and coal production was due to higher volumes at several refineries. The separate real Q3 GDP measure is seen rebounding 3.2% in Q3 (q/q, saar) after the 1.6% drop in Q2.

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