A very poor start for European stocks this morning. As I write I see the main index (Eurostoxx 50) down 1.3%, no doubt a reaction to the steep fall in Shanghai overnight. As I mentioned some time ago the Chinese government’s actions to halt the decline in stocks was unlikely to convince retail investors to stay the course. Once again the Chinese index looks to be attracted back down towards a major support level. Apart from burnt fingers, and a real loss of wealth (albeit probably distributed amongst a large number of investors), it’s difficult to say whether this will have much of an impact on confidence in China. It may give some pause to retail investors and encourage a more rational investment methodology in future, but perhaps that’s too optimistic. There has always been something of the casino about retail investors in the Far East. Time will tell..
More importantly major currency markets, apart from a strong recovery in EUR/USD appear largely indifferent so far. Perhaps as unenthused about a Monday morning as the rest of us? Certainly the euro is paying scant attention to the rumoured scepticism of bailout monitors in Greece. The monitors are somewhat disbelieving of being granted the required access to staff and facilities in Athens. There are also concerns amongst creditors that the legislation that has been voted on so far will prove insufficient before a new deal is agreed. My view on this is that Northern European countries seriously overestimate the importance of legislation in Greece. Execution is the only thing that matters. Please don’t misunderstand me, I am not suggesting that the ‘right’ policies will be implemented without legislation, I am sceptical that legislation will ensure that the right policies will be implemented at all. In any case, the euro is strengthening this morning and whether this is primarily due to technical factors or not is difficult to say. The bias at the margin does appear to be mild dollar weakness, although pound sterling which, along with the dollar, had been a leader, has now firmly flipped towards weakness.
Some fairly important data this week. Today we’ll get German expectations data; Eurozone money supply; and durable goods in the United States. But the bigger stuff happens a bit later on in the week: Spanish, U.S and UK GDP numbers; Japanese retail sales, some Eurozone country consumer confidence data; and Michigan sentiment data in the United States. Quite a feast of additions to the macro-scope. We will certainly have a better sense of where global growth prospects are by the end of the week. More importantly we will continue to gauge how the currency markets react to this new data, and this will inform our views on where currency trends might go. For now, we maintain our view that USD strength should persist, but the retail sales disappointment of last week seems to have done for sterling for now. It seems clear that the market got ahead of itself and positioning has been too long of GBP. It therefore makes sense for GBP to underperform for now, as the market finds a new equilibrium.
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