Despite a plethora of macro and micro risks, positive sentiment has become entrenched today. The likely catalyst for the broad risk-on environment is an expectation for ECB policy easing. Wall Street was stronger and Asia followed with gains across the board.
EURUSD is back to year lows at 1.1130. Our view is that Draghi and gang will hold back but signal to ease as early as September. Yet, markets are pricing in approximately 50% for a rate cut of 10bp. Data continued to weaken as the headline IFO business climate index in Germany fell to 95.7 in July, from a revised 97.5 in June. German 10yr real yield dropped below resistance at -1.38% last week highlights the market's concern.
Global growth is slowing. The primary culprit is the effect that geopolitical uncertainty, specifically trade tensions, is weighing on business sentiment. The drag has materialized in weakening in global capex growth and unsettled Asia supply chains. Cloudy business outlook, whether real or imaged, equates into managers slowing production resulting in softer factory output. Global manufacturing PMI suggests to a complete halt in factory output in June. The knockdown effect is now being felt globally. It has been estimated that US-China trade war has lowered annualized growth by 1%. In our view, what comes next for global growth depends entirely on the direction of trade tensions, among other geopolitical issues.
Central banks are now at a crossroads. Should they deal with the deceleration already occurring or come out with “both guns blazing” to halt any intensification. On 31st July the Fed will communicate its strategy to the world. The recent Fed’s dovish language indicates that members are concerned. However, how that manifests itself into policy action is far from certain. Fed Chairman Powell recently pledged to the Fed will “act as appropriate to sustain the expansion.” Market has priced in 30bp interest rate cuts.
Disclaimer: While every effort has been made to ensure that the datat quoted and used for the research behind this document is reliable, there is no guarantee that it is correct, and Swissquote Bank and its subsidiaries can accept no liability whatsoever in respect of any errors or omissions, or regarding the accuracy, completeness or reliability of the information contained herein. This document does not constitute a recommendation o sell and/or buy any financial products and is not to be considered as a solicitation and/or an offer to enter into any transaction. This document is a piece of economic research and is not intended to constitute investment advice, nor to solicit dealing in securities or in any other kind of investment.
Although every investment involves some degree of risk, the risk of loss trading off-exchange forex contracts can be substantial. Therefore if you are considering trading in this market, you should be aware of the risks associated with this product so you can make informed decisions prior to investing. The material presented here in not to be construed as trading advice or strategy. Swissquote Bank makes a strong effort to use reliable, expansive information, but we make no representation that it is accurate or complete. In addition, we have no obligation to notify you when opinions or data in this material change. Any prices stated in this report are for information purposes only and do not represent valuations for individual securities or other instruments."