Back to normal?

Caution prevails
In the west there is considerable speculation about when the US Federal Reserve will increase interest rates. In China the speculation is about whether the authorities will continue to support share prices. Problem is, such "rumours" are illegal in China and 197 people have been arrested for spreading them.

What is not in doubt in either case is that the "authorities" - the Fed and the People's Bank of China - are acutely conscious that their stock markets are sensitive to interest rates. Neither of them is keen to pull the rug from under what are, by many accounts, overvalued equity prices in case their resultant decline dampens the economy. For the PBoC that means further relaxation of monetary policy: for the Fed it means dithering about taking the rate-hike plunge.

Comments by the Fed vice chairman in an interview on Friday implied that there is still the possibility of an increase on the 17th of this month. However, the suggestion did not do a whole lot for the US dollar, which is unchanged against the euro from Friday's opening level. 

Sterling struggles
One of the biggest casualties of that thinking has been the British pound. In the last week it has lost ground to all except the euro and the Swiss franc. Although the BoE governor said on Saturday that "developments in China are unlikely to change the process of rate increases", investors aren't convinced.

The first revision to Britain's second quarter growth did not do anything for the pound either. A quarterly expansion of 0.7% was in line with the initial estimate and with expectations. It was a decent enough figure but not sufficiently strong to electrify the Monetary Policy Committee.

The main loser over the weekend was the NZ dollar. It was not particularly hurt by weaker purchasing managers' index readings from China this morning but did take a hit from yesterday's news of a six-year low in business confidence. Australia's dollar was unmoved by the Reserve Bank of Australia's decision to keep its benchmark interest rate unchanged at 2%.

Manufacturing and jobs
Today brings the global round of manufacturing sector PMIs and employment data from Germany, Italy, Euroland and South Africa. Canada reports on Q2 gross domestic product, which is forecast to have contracted for a second quarter.

The Aussie was protected this morning by a manufacturing PMI that was close to the strongest in two years at 51.74. Sweden's was positive at 53.2 but down by two points on the month. Among the readings yet to come the unlikely hero is predicted to be Italy with a 54.8 while the readings from Switzerland and France are expected to show continued shrinkage. There will be figures from the UK for mortgage approvals and personal loans.

Perhaps the most interesting development to come out of last week's ferment was investors' new attitude to the euro. With the cancellation of Grexit it has become a safe-haven currency, shadowing the yen.