Today seems to be like a nice day for a short lull in the market battle, as only the Business Condition survey among firms in the New York City area is going to be published during today's trading session. There are no more noticeable macro reports that could be highly appreciated by the investment community. The Johnson's Redbook Index will come later, which is just same-store sale figures in a sample of large U.S. merchandise retailers representing about 9,000 stores. It’s slim pickings, or even next to nothing, while many are really eager to look through the service sector reports from the United States, Europe and China on Wednesday.
However, the U.S. Dollar index (DXY) declined slightly from its Monday's high of 93.99 to the lower area of 93.20-93.50 by European noon. The most obvious reason for why this is happening with the Greenback is just the effect of the U.S. Manufacturing Purchasing Managers Index (PMI), which was released yesterday evening by the Institute of Supply Management (ISM). It has reported a better-than-expected expansion at 54.2 points, which is the best result since April 2019. The output remains far below the levels they were several months ago, but even the manufacturing price component at 53.2 points was much more positive than it was expected to be in the expert polls of Reuters, and on a level with the pre-virus banks of the low-inflation rivulet.
This paradox was already described yesterday: some positive macro reports from the United States may result in a "perverse" effect of the U.S. Dollar further weakening, as it seems like most investors are losing the only reason to buy more low-yield U.S. Treasury bonds as safe haven instruments, because the "smart crowd" fears are starting to disappear. When the US major stock indexes are making a step higher in response to the fresh inspiring U.S. macro report, this kind of proof of potential heroism for the American economy may only strengthen the same mechanism and finally... may weaken the U.S. currency even more.
The producer price index (PPI) in Europe rose also more than forecast in June, which assisted EUR/USD. Industrial producer prices rose by 0.7% compared to May 2020, as economists had expected a 0.5% increase on average in the Euro area, according to Bloomberg's poll. The data is an indicator of a better manufacturing activity after the previous month, when prices decreased by 0.6% in the Euro area in May, and by 0.5% in the European Union (EU). But compared with June 2019, the industrial producer prices decreased by 3.7% in the Euro area and by 3.4% in the EU. That still indicates the difficulties with the build-up of the European economy.
Australia's second-biggest city, Melbourne, announced a curfew and some fresh restrictions on movement to suppress an infection outbreak there. The economic recovery is likely to be "both uneven and bumpy", the Reserve Bank of Australia (RBA) said in its policy statement today, forecasting Melbourne's partial lockdown to push unemployment to about 10% later in the year from its current level of 7.4%. But markets appreciated the RBA Board's decision to maintain the current policy settings, including the targets for the yield on three-year Australian government bonds, as this target “will remain in place until progress is being made towards the goals for full employment and inflation".
Philip Lowe, the Governor, stated: "The worst of this [global economy] contraction has now passed... the recovery is expected to be only gradual and its shape is dependent on containment of the virus. While infection rates have declined in some countries, they are still very high and rising in others. International trade remains weak, although there has been a strong recovery in industrial activity in China over recent months". At the same time, he emphasised that "globally, conditions in financial markets remain accommodative... volatility has declined and there have been large raisings of both debt and equity... the prices of many assets have risen substantially despite the high level of uncertainty about the economic outlook".
However, many people in the market saw hopes of a more upbeat outlook from the RBA message as "the Bank's mid-March package of support for the Australian economy is working as expected... there is a very high level of liquidity in the Australian financial system and... authorised deposit-taking institutions are continuing to draw on the Term Funding Facility, with total drawings to date of around $29 billion", and as further use of this facility is expected over coming months. A good sign for the Aussie is that tomorrow the RBA will purchase more Australian government securities (AGS) in the secondary market to ensure that the yield on 3-year bonds remains stable, and "further purchases will be undertaken as necessary".
Philip Lowe also added that the Australian economy is going through a very difficult period and is experiencing the biggest contraction since the 1930s, but "as difficult as this is, the downturn is not as severe as earlier expected and a recovery is now underway in most of Australia". In the baseline scenario, the country's output falls by six % over 2020 and then grows by five % in 2021. RBA also considered other scenarios when "a stronger recovery is possible if progress is made in containing the virus in the near future", and if "this progress would support an improvement in confidence and a less cautious approach by households and businesses to their spending". So, the takeaway from his words was moderately positive for AUD/USD, which climbed above 0.7150 after 0.7115 levels just before the RBA release and above the 0.7075 lows of the current week.
The British Petroleum Company (BP) energy stocks jumped 5.8% even though it cut its dividend and reported a record $6.7 billion loss in the second quarter. This was probably the most noticeable phenomenon on the European stock markets today. Rather disappointing earnings reports came from Bayer Pharmaceuticals and especially from Diageo, as Johnnie Walker maker reported a sharp drop in sales for the year as even higher alcohol sales in North America failed to make up for slumps in most other countries. Mixed corporate releases may mean that similar mixed price action could be expected in the European trading hours.
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