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Mixed messages

Recession: It’s official

There was no clear sense of purpose in financial markets on Monday. The most glaring discrepancy was between equities, where America’s S&P500 index recovered all of its losses in the year to date, and the yen and franc, which took first and second place for the day.

That is not the way the cookie is supposed to crumble. Optimism typically translates into higher prices for riskier assets such as shares, and the off-loading of safe-haven currencies. Yesterday investors were buying both. The Japanese yen strengthened by 1.4% - two yen – against sterling. It looked as though somebody had come to the conclusion that the yen’s upward progress had been overdone last week and decided to provoke a correction to the $1=¥108 level that had held the dollar back last month. It worked, and USD/JPY was supported around that level ahead of London’s opening this morning.

The mood of investors could also have been confused by “official” confirmation that the US economy is in recession. A Business Cycle Dating Committee at the National Bureau of Economic Research keeps track of economic peaks and troughs. On Monday it announced that the business cycle peaked in February after 128 months of expansion, “the longest in the history… dating back to 1854”. It was the quickest recession decision ever made by the committee.

 

ECB to step up

When European Central Bank president Christine Lagarde addressed the European Parliament on Monday she volunteered her services to help defuse the legal tussle between Germany’s constitutional court and ECB monetary policy. Thus far she has left the Bundesbank to deal with that end of the debate.

Her offer yesterday was to help, if requested, “without ever compromising on our independence, compliance with EU law, and validity of the European Court of Justice decision”. During her presentation Ms Lagarde also encouraged politicians to press ahead with their approval of €750 billion of support measures proposed by the European Commission: “It will be important to adopt this package quickly”. The euro was almost unchanged against the US dollar and British pound.

The only euro zone ecostat was the Sentix measure of investor confidence. At -24.8 for June it was 17 points higher on the month, though a couple of points short of forecast.

 

EU GDP

Today’s highlight will probably be the revised figure for euro zone gross domestic product in the first quarter of 2020. Analysts expect the earlier estimate to be unchanged, with a 3.8% quarterly contraction (annualised -15.2%).

Overnight the British Retail Consortium reported “another month of struggle for retailers” in May. Total sales were down by 5.9%, a “less drastic” decline than April’s fall of 19.1%. NAB’s Monthly Business Survey saw a “broad-based improvement” in Australian business conditions that left them still “deeply negative”. The Aussie is half a cent ahead on the day, alongside the Canadian dollar.

There are not many supporting acts for Euroland GDP today. NFIB’s US small business optimism reading seldom sets pulses racing and the same is true of US wholesale inventories. Tonight there are data for Australian consumer confidence and mortgage lending, as well as Chinese inflation.

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