Markets in Details: 24 July 2019

24 July, 2019

Eurozone manufacturing weakness

Germany posted a significantly weak Manufacturing PMI which showed the country’s manufacturing activity experienced a sharp contraction in July especially in the automotive sector. Europe’s largest economy is facing downward pressures from Brexit and trade frictions. The index dropped to 43.1 widely missing expectations of 45.1 and declining sequentially from the June reading of 47.6.  The latest PMI number caused eurozone sovereign bonds to rally and is expected to increase the odds of a rate cut by the ECB on Thursday.

France also posted weaker than expected Manufacturing PMI of 50 in July. Economists had predicted 51.6 for euro area’s second-largest economy. IHS said the weaker performance was attributable to softer new orders, lower sales at manufacturers and overall nervousness due to geopolitical tensions.

Overall eurozone PMI came in at 51.5 in July and the services data showed that growth in the services sector remains healthy for now.

Trade Talk Hopes

WTI crude strengthened to above $57 on Wednesday as trade negotiations are expected to continue with Chief Negotiator Robert Lighthizer and Treasury Secretary Steve Mnuchin set to travel to China Monday next week to attend the first face-to-face meeting since the May discussions.

100 days

The British pound is sitting at $1.25, near the bottom of the range of 1.20-1.44 for the currency since the UK voted to leave the EU. The current price suggests a sizeable amount of negative news has been priced in into the currency but that does not mean the only direction it can go is up as the new UK Prime Minister has 100 days to deliver what Theresa May could not in three years.

Boris Wins

UK will have a new Prime Minister on Wednesday after Boris Johnson won the Conservative Party leadership race by a 2-to-1 margin over Foreign Minister Jeremy Hunt. Johnson is expected to bring in a new team to deliver his promises, including a do-or-die Brexit at the end of October. Finance Minister Philip Hammond and Mr Hunt, the Foreign Minister, are both expected to leave their current ministerial posts over disagreement with Johnson on fundamental issues and Brexit.

Johnson’s next 100 days will be intensely scrutinised and he faces an uphill climb from the get-go. Brussells has indicated their unwillingness to accept any changes to Theresa May’s Brexit plan while senior conservative leaders are pushing against a hard-type Brexit.

Global growth revised lower

The IMF has revised its global growth outlook again and now expects the global economy to expand 0.1 percent lower, that is by 3.2% in 2019. The IMF noted risks are weighing heavily on the downside with weak trade prospects due to trade wars, Brexit concerns, and low inflation. The international fund now considers a hard Brexit to be a plausible outcome given Boris Johnson’s win today.

New debt ceiling

The White House and Congress has struck a deal to raise the $22tn debt ceiling until the middle of 2021, effectively removing the adverse possibility of a U.S. debt default before next year’s presidential election. The deal represented a compromise between both Democrats and Republicans which would enhance national security and middle class priorities and does not include any poison pills such as funding for a border wall with Mexico, termination of demand for the president’s tax returns or any other controversial proposals. The deal is expected to pass both houses and will be signed by President Trump within days.

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