Euro equity markets up strongly but US more cautious despite "not-bad" data

By Mike Burrowes

This morning we open to relatively familiar levels for the NZD as we embark upon spring.

Once again we can highlight support from leveraged trading accounts seeking a haven, though a variety of real money appetite has been more prevalent in our flows of the last 24 hours.

This morning we start the day near 0.8520 against the USD, and steady at the 73.00 level on the TWI. Though we note overnight peaks have been retreated from over the course of the New York session, the Kiwi caught in a market that is juggling various commentary & data items from both sides of the Atlantic.

Yesterday, as we expected, businesses became less optimistic in August, the NBBO outcomes no doubt spooked a bit by the extreme volatility on world financial markets especially in the first half of the month. However, at 34.4 businesses confidence has held up very well given recent developments. Even more encouraging is that firms’ own activity expectations effectively did not budge at all. This is a better guide to near term economic growth, with this indicator still consistent with around 5.5% annual GDP growth ahead.

Employment and investment intentions were down a bit, but still positive. Inflation indicators a bit mixed with pricing intentions down to 20.5 (from 29.0 in July), while inflation expectations bolted higher to 3.45% from 3.15%.

All up, the level of these indicators still point to very robust domestic growth ahead along with inflationary pressures. The RBNZ will have to respond to these pressures before too long, even if the world situation stays the RBNZ’s hand in September.

This morning’s Overseas Trade Indexes, for Q2, will also garner attention at 10.45am. We expect further decent gains in their export and (core) import volumes, along with a fresh 37-year high in the merchandise terms of trade. Later at 1.00pm we will see ANZ commodity price results, for August, noting that these will be the first set to indicate impacts from the global ructions.

On the day the NZD would initially appear well supported on any initial retreat to the 0.8475/0.8500 window, while headwinds prevail at the 0.8575 level.

Majors

After one of the most volatile four weeks in years for global financial markets, it wasn’t entirely clear whether we’d the see classic month-end squeeze higher to flatter asset managers’ performance figures or whether battle fatigue had already set in. As it was, European equity markets moved steadily higher from the opening bell, encouraging a better tone in risk assets and currencies and helped by yet another fall in German unemployment. It may only have declined by 8k in August, but this was the 20th consecutive monthly decline.

The stand-out exception in a more risk-friendly environment was the Swiss Franc which ‘enjoyed’ an extremely lively and somewhat counterintuitive session.

The Swiss authorities this morning broke with recent precedent and neither said nor did anything. This was noteworthy because on each of the first three Wednesdays this month we have seen either Government announcements or SNB action aimed at curbing the strength of the Swiss Franc. EUR/CHF began to slide from early morning European time, and with a joint Press Conference hosted by the Finance Minister and her Economics Minister Johann Schneider Ammann failing to mention any formal peg to the euro, the pair extended its decline to more than three cents from above 1.1850 to below 1.1550. We stick with our view that SNB wants to see EUR/CHF at 1.25 to ward off the deflation threat and that – barring Armageddon in stocks – it is very likely to get its way.

The ADP Survey in the United States showed a 91k increase in private payrolls; somewhat below consensus but better than many market participants had secretly feared.

The slight lift this gave to US equity futures was then amplified by a significantly better than expected Chicago NAPM number: 58.3 in August compared to expectations of 52.7 and ‘whisper numbers’ as low as 48. By London afternoon, Wall Street was on solid ground reflecting a day where most European bourses were up 2-3% and the AUD and NZD had challenged the 1.0720 and 0.8570 levels respectively.

The New York afternoon has been noticeably more circumspect, despite the data updates. Rumours from Europe of the Greek government considering legal advice on exiting the Eurozone, though subsequently denied, have spooked the market – a stronger USD clouding FX & investor sentiment amid concern that where there’s smoke there’s two politicians playing with matches.

The month-end fix came and went with no dramas and the scores on the doors for August show – of the 17 most traded currencies – the NOK in top spot with the MXP in bottom position. Only 5 currencies rose against the USD with 11 falling. The AUD and NZD were in 14th and 15th places respectively; not a great performance in absolute terms but they have proved far more resilient than in previous periods of extreme asset market turbulence.

Aside from the local data updates there’s plenty to monitor from offshore today, Australian monthly retail numbers and the AIG PMI only part of the menu. At 1.00pm local time the market sees the latest monthly update of Chinese PMI, surveyed at 51.0 for August after printing 50.7 in July.   

See our interactive swap rates charts here and bond rate charts here.

Mike Burrowes is part of the BNZ research team. 

All its research is available here.