As market participants prepare for a busy week of economic events, the developments over the weekend have led to cautious price action out of the gate for the new trading week, with sentiment turning sideways midway through the European session. The precarious position for investors was brought on by reports out of China that showed industrial profits dropped 8.8%, following on the heels of a shallower 2.9% decline for the month of July. Sluggish consumer demand, falling prices, and the exodus of investment capital has all contributed to the slump in industrial profits, and is fanning speculation that the coagulation of soft economic indicators warrants greater policy response from the central bank. The official PMI data released later this week will likely help strengthen the narrative of slowing growth in China, where the manufacturing PMI is expected to remain below the boom/bust level of 50. The Shanghai Composite was little phased by the industrial profit numbers, edging up 0.28% on its session, while the offshore yuan strengthened slightly against the big dollar early on Mondaymorning.
In Europe, Spanish equities are outperforming the rest of the common-currency bloc, with the regional equity index only down by 0.7% as we go to pixels, whereas the FTSE, CAC, and DAX are all off by over 1.5%. The positive response towards Spanish assets is the fact that the regional elections in Catalonia stopped just short of an overwhelming victory for the secessionists, though the coalition for an independent Catalonia did secure 62 of 135 seats in parliament. The Sunday night election was being seen as a proxy for Catalonian independence from Spain, as the coalition party that had been formed promised to declare unilateral independence from Spain within 18 months if they won the election. The concern for the European economic landscape was the uncertainty around what a majority vote for the secessionists would amount to, as the region of Catalonia accounts for almost 20% of Spanish GDP, along with the fact that if there is no agreement as to how the share of national debt is split, Spain’s debt-to-GDP would be projected to rise from 100% to 125%. There is still a chance that the coalition party strikes a deal with the CUP who snagged 10 seats in parliament; however, the CUP had said it would previously not support the leader of the coalition party as ruling president. That being said, even though the CUP is a far left anti-capitalist party, should the goal of an independent Catalonia be that important, it is not out of the realm of possibilities that the CUP is brought into the fold in order to garner the majority needed to begin secession talks. The euro is slightly lower against the greenback this morning, though still contained within the recent range EURUSD has been carving out over the last week.
As we get set for the North American open, US equity futures are displaying a distinct red shade to their tape, mimicking the dour sentiment experienced so far in Europe, while front-month crude is being pressured lower as WTI dives back below the $45 mark. The resurgence of the USD as a result of divergence in monetary policy trajectories was sparked by comments from Yellen at the end of last week, with market participants now awaiting further confirmation from economic data. Barring any surprises, near-term economic developments are likely to strengthen the key divergent theme that is emanating throughout currency markets, though the Fed’s preferred measure of inflation the Core PCE index is on the docket for later this morning. The Core PCE measure is expected to tick higher in August, with positive upward momentum in both personal spending and income, which if realized, would help fuel the narrative that a rate hike for December 2015 is still the preferred course of action from the Fed. NY Fed President Dudley is also set to speak this morning, and his words will likely be of market interest considering his initial comments after the turbulence in China helped equity markets rebound when he suggested a rate hike in September had become “less compelling.” Should he echo the speech heard from Yellen last week which outlined the beginning of a rate tightening cycle in 2015 is the preferred course of action, then we’re likely to see participants bid up the value of the greenback, as the divergence in monetary policy solidifies.
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