The big news this morning is the Q2 GDP number out of Germany, while it was positive and an improvement on the prior quarter it was short of expectations, which when you consider it… the exceptionally weak euro should have led to a bonanza for the economy which counts for almost one third of Eurozone GDP. To make matters worse French GDP, which also came out, was stagnant. This is all very disappointing, considering the conditions were perfect for positive data surprises. This just reinforces the point that a lot of work is required before the Eurozone is on a sustainable and decent growth path.
Later on today we get GDP data from some other Eurozone countries – Italy and Portugal to be specific, and in the afternoon we get Michigan sentiment data in the United States. Reading through market reports, it seems that economists are still anticipating as many as two interest rate hikes by the Federal Reserve this year according to a Reuters poll. This is slightly at variance with market pricing at the moment which reacted to the Chinese devaluation by lowering the probability of a September Fed hike. Part of the rationale for sticking with the view despite the events of this week is that interest rates are near zero so it is believed that even a cumulative rise of 0.5% from now to the end of the year would not exact a significant burden on the US economy which continues to grow at a reasonable pace.
We are moving away somewhat from the initial excitement surrounding the renminbi move, indeed the decline in the Chinese currency has been halted for now. But the collateral damage is there with sympathetic moves in other Emerging market currencies, lower prices in the commodity complex etc. A commodity expert has even speculated that we may be close to a bottom in some parts of the commodity complex, the idea being that the Chinese are notoriously good at identifying market bottoms and they could secure excellent prices in a swathe of commodities at the moment. They could be right, but it won’t be enough to stop the problems that are no doubt brewing behind the scenes for a number of resource rich economies. Even the Saudis appear to be having some fiscal problems, so you can imagine what less financial strong resource rich economies are experiencing at the moment.
We continue to maintain a fairly positive view on the US dollar, although there is more scope for short term weakness in my view than perhaps was the case just weeks ago. In addition we are more bullish on the euro at this point than the pound sterling, albeit relatively speaking. Our bigger picture view (i.e., longer term) remains the same, we are in the middle – we may not even be halfway through – a major dollar bull trend.
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