EU fudge extends stock bounce

Summary

A better end to a punishing week for Chinese stock markets and a deal on migration at the EU summit that cools Germany’s political crisis helps extend Europe’s share bounce into Friday.

Border deal bridges some gaps

A watered-down deal to strengthen EU external borders is proving to be better than no deal at all for Germany’s Chancellor Angela Merkel. Her CDU-led coalition government was inching towards collapse earlier in the week as an agreement that is palatable to interests further to her right looked out of reach. Instead, an arrangement to share out refugees on a voluntary basis lifts the weight from both the euro and Germany’s DAX index after both saw near one-month lows in recent days. June remains a month that global investors would rather forget but now, at least, European stocks are on track to end the week a little worse than flat. Pressure for a bounce began on Wall Street amongst battered bank stocks before triggering similar bargain-hunting instincts in Asia. As it stands, U.S. stocks are set to remain firm. September futures contracts are posting the strongest pre-cash open gains since the first week of the month. None of this necessarily provides a robust defence against potential reversals with ample scope remaining for sentiment to relapse.

Beijing calms before trade storm

China’s central bank assured “ample liquidity would be available”, as it reduced restrictions on foreign investment in sectors like banking, automobiles and capital equipment, putting a floor under main Shanghai and Shenzhen indices. If the most obvious explanation behind the week’s monetary and political moves seen in the country this week proves correct though, Friday bounces could turn out as ephemeral as suspected. The lowered volume in Beijing for most of the week about its trade conflict with the United States has gone hand in hand with quiet liquidity enhancing measures by the central bank, including the largest yuan midpoint fix for a year and half. Calm communications and calming actions have stabilised financial markets but there’s little sign the government intends to let the week’s continued U.S. sabre rattling pass entirely unchallenged. The first wave of tariffs by both sides kicks in on Monday and it’s likely to bring the next inflection point in the conflict and for risk appetite as well.

UK service sector accelerates

The increasingly ‘risk’-coupled dollar is nevertheless on the backfoot as the euro holds EU migrant deal gains and sterling basks in acclaim from a slight upward revision in Q1 growth. The annual result remains the same in the preliminary estimate, but service sector output was palpably stronger in the latest snapshot than in the weather-dampened spring. Whilst the annual overall print remains the worst since 2012, a services economy accelerating from 1.2% to 1.6% backs the view of most Bank of England policymakers that the early-2018 slowdown was temporary. In turn, credence is given to likelihood of a further 2018 interest rate rise, after the bank’s about turn in May. After a 60-pip plus spike, sterling hesitates as Friday still holds further crucial developments at the EU Summit when discussions belatedly turn to Brexit. Both the reduced time for discussions—after negotiations on borders overran into the early hours—and intractable positions of the EU and Downing Street suggest there will be no breakthrough later and that substantive efforts will have to wait till the Quarterly EU Summit in October.

A lot to do

Merkel’s admission that there remained “a lot of work to do to bridge the different views” referred to the migration deal but has echoes. The borders agreement leans heavily on voluntary arrangements on a largely temporary basis. It remains unclear whether it will suffice to resolve differences with the CDU’s chief coalition partner, CSU, and ultimately save the government. Trade-related events will also trundle on next week expanding emerging market growth and liquidity risks further, particularly as the dollar shows signs of  recoupling with Treasury yields. Friday’s pause in European currency and equity market turbulence is likely to prove to be just that.

Watch the Fed-watched PCE

The Federal Reserve-eyed Personal Consumption Expenditure releases this afternoon are the most important scheduled remaining economic watch point. The more granular print than in Thursday’s GDP package is forecast to show that growth quickened by a tenth of a point to 0.4% in May. Dollar advantage is likeliest if the adjusted year-to-year outcome belies expectations for a 0.2 percentage point dip to 0.4%, though a core result of 0.2%, flat, should be more impervious to overshooting estimates.