European Outlook: Asian stock markets are mixed, with Japan underperforming and closing down for the first time in seven days, as the strengthening Yen weighed on exporters and markets take a breather after recent gains. U.S. stock futures are also down, but FTSE 100 futures are moving higher, as a weaker currency increases appetite from foreign investors. The ECB will likely follow the BoE’s example and take a wait and see stance for now at tomorrow’s meeting but falling yields may force the central bank to tweak the QE program again in September. Today’s calendar has German PPI at the start of the session, as well as U.K. labour market data for June, which will give a picture of the momentum in jobs markets ahead of the referendum. The Eurozone has BoP and current account data as well as consumer confidence in the afternoon.
IMF cut its global growth estimate to 3.1% in 2016 from 3.2% previously, in its quarterly World Economic Outlook update, on the back of Brexit uncertainties and fallout. It also lowered its 2017 forecast to 3.4% from 3.5%. Before Brexit, the Fund had planned on boosting its estimates. Growth could be as soft as 2.8% under a severe Brexit scenario. The Fund maintained its forecasts for 2.2% U.S. growth, and 1.6% for the Euro area. China was bumped up to 6.6% from 6.5%. Japan was knocked to 0.3% from 0.5% due to the firmer yen.
IMF trimmed its UK growth forecast: 2016 to 1.7% and 1.3% for 2017, nearly one percentage point below its previous projection but still much more optimistic than most. The IMF is assuming “limited” repercussions from exiting the EU, specifically that the UK will strike up a Norway-like deal, which grants unfettered access to the single market but at the price of maintaining open borders and payment of EU fees, but without any influence. Given what we know about the stance of the UK government and what Leave voters voted for, it has to be said that this looks unlikely at the moment, although it’s conceivable there could be backtracking as the economic consequences of the prevailing uncertainty (recession by divestiture) become more apparent. The European Commission, by contrast, revised its UK GDP forecast to -0.3% y/y for this year, and this in a “mild” Brexit scenario, and to -0.9% y/y next year, and -2.6% y/y in the case of a “severe” Brexit scenario.
US Market Reports: A lean data calendar may have contributed to a brief hiccup on rates Tuesday, but it wasn’t sustained as stocks drifted lower from recent historical highs. On the one hand, housing starts surged 4.8% in June, but on the other hand, this was from downwardly revised levels on May and April. The IMF cut global growth forecasts, which curbed enthusiasm for stocks on the margin, while nerves began to fray in Europe and Turkey again. WSJ Fedwatcher Hilsenrath continued to view September as the most likely month for the next Fed hike, though such a move as early as next week remains out of the question.
Main Macro Events Today
- UK Earnings and Jobs Numbers – 08:30 GMT – UK Average earnings including Bonus are expected to rise to 2.3% from 2.0% and Claimant count for June expected to rise by 4,000 from a decline of 400 last month. The unemployment rate expected to remain unchanged at 5%.
- US Crude Oil Inventories – 14:30 GMT – Last week’s draw down of 2.55 mln barrels was greater than expected and added to pressure on the oil price, this week is also expected to be a draw down but reduced to 2.23 mln barrels.
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About Janne Muta, HotForex’s Chief Market Analyst
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