Daily Market Digest: Brexit Dominates, China Industrial Production Flat

2 14

Brexit theme dominated the markets on Monday following the weekend polls showing that the Brexit’s ‘Leave’ campaign continued to gain an edge. In China, industrial production data was released today.

Today’s Economic events

  • Japan BSI manufacturing index -11.1 vs. -2.1
  • China industrial production y/y 6.0% vs. 6.10%
  • China retail sales y/y 9.60% vs. 10.50%
  • Bundesbank President Weidmann speech

Industrial production in China stays flat in May

Industrial production numbers from China, released earlier today showed a year over year increase of 6.0%, rising at the same pace as in April. On a year to date, basis, China’s industrial production jumped 5.90%, modestly higher than April’s 5.80%, data from the National Bureau of Statistics showed earlier today. Factory output in the manufacturing, mining, construction, and utilities sector rose 6.0% compared to a year ago.

In a separate report, retail sales numbers remained flat, rising only 10.0% on a year over year basis in May. This was slower than April’s increase of 10.10%. On a year to date basis, retail sales were soft, rising 10.20%, down from April’s increase of 10.30%.

Fixed investment data also slowed, rising only 9.60% at an annualized pace after rising 10.50% in April. Commerzbank AG economist, Zhou Hao said “The data is not that good. There’s definitely some kind of downside risk to the economy, especially with fixed asset investment. Growth is under pressure.”

The data released today highlights the difficult choice for the PBoC on whether to increase monetary policy stimulus or to rely on investment-led growth. The PBoC was on an aggressive monetary policy easing bias last year and has remained on the sidelines this year.

Fitch affirms UK credit rating at AA+

On Friday, credit ratings agency, Fitch reviewed a few of the sovereign credit ratings, including the UK. The company affirmed UK’s credit rating, an investment worthy AA+ and maintained its outlook on the UK as ‘stable.’ Commenting on the June 23rd referendum vote, Fitch said that it “maintains a base case that the UK will remain in the EU” noting that this reflected their projections. However, the ratings agency said that in the event that the UK votes to leave its EU membership, it would review the UK’s ratings shortly thereafter and would consider the medium – long term effects of the outcome as well as the future of Scotland. While Fitch maintained a positive outlook on the UK, an executive from Standard and Poors said just a week ago that the uncertainty would leave the economy susceptible to a ratings cut. As part of its credit rating review, Fitch also forecasts that UK’s GDP growth is expected to rise 1.90% in this year and 2.0% in 2017 and 2018.

Taron Wade, global ratings director of the S&P’s corporate and government ratings, told in a TV interview that “the risk of the UK losing its rating should it vote to leave the EU would be great.” She said that there could be short term financial market volatility as an immediate risk and also said that the sterling could depreciate as a result, should the UK vote to give up its EU membership. Wade said that there was already an evidence of a decline in capital expenditure spending, which could result in making companies less competitive over time.

“It’s concerning if you don’t know what the regulatory environment will be in terms of competition commission and also U.K. companies could get left out of European consolidation trends,” Wade said.

Bundesbank: Jens Weidmann says no need for more stimulus

The German Bundesbank president and ECB governing council member, Jens Weidmann said at a press conference in Frankfurt today that there was no need for the ECB to expand its monetary stimulus program any time soon. Dismissing calls for further policy expansion, the Bundesbank chief told reporters that the definition of price stability requires that the target inflation rate is achieved in the medium term. He said that this gives the European Central Bank enough time to wait for the effects of its monetary policy to impact consumer inflation. The ECB cut interest rates to zero percent and cut the deposit rates into negative while expanding its QE purchases to over 1 trillion euro in March. Last week, as part of its policies, the ECB started to purchase corporate sector bonds in Europe, alongside its sovereign bond purchases.

At its recent meeting, the ECB president Mario Draghi said that the central bank was committed to achieving its inflation target and more recently, at an economic focus in Brussels, urged political leaders in Europe to unite and launch fiscal stimulus, noting that monetary policy alone cannot be sustainable. The euro fell sharply after the comments from Draghi last week and continues to trade weaker, falling below $1.130 earlier today.

Markets expect that further decline in EURUSD is likely as a possible outcome of the uncertainty around the UK’s referendum vote. Unlike the sterling which has been volatile, many believe the single currency has a lot of ‘catching up‘ to do.

Sell EUR/USD, Target $1.08- Morgan Stanley*

Analysts at Morgan Stanley recommend short positions in EURUSD, for a target to $1.08 with stops at $1.140. Analysts at MS not that with opinion polls showing the risk of a UK vote to leave the EU, MS prefers to sell the euro than the British Pound. The basis for the preference of selling EURUSD is because “although the U.K. currency is “certainly vulnerable,” the euro has more catching up to do”, according to the MS note.

Morgan Stanley says that it would expect the euro to “depreciate significantly” on a Brexit vote but notes that the options markets markets are only just “starting to come around to this,” with one-month EUR/USD implied volatility is only starting to spike in recent days. “We believe the market is still not pricing in enough downside risk,” it states. The euro is trading below $1.130 today.

* Institutional Call of the day is not a recommendation or an endorsement by Orbex.com to buy or sell

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