July 30, 2019 / 7:38 AM / 2 months ago

Daily Briefing: Nervous eurozone shoppers hold back

LONDON (Reuters) - If economies are kept afloat by confidence, it is in short supply in the eurozone, according to read-outs this morning. Asked whether now is a good time for big-ticket purchases, more and more Germans are shaking their heads, GfK's snapshot of consumer morale reveals for its third monthly fall in a row.

Shoppers walk in a Karstadt hot deal department store in Frankfurt/Oder October 24, 2014. REUTERS/Fabrizio Bensch

That is a significant finding given that the eurozone’s top economy is experiencing record-high employment, above-inflation pay increases and low borrowing costs: it seems the threat of trade wars and a damaging Brexit are starting to make Germans worry that those achievements could start to be eroded.

There is a similar phenomenon in France, historically more reliant than Germany on strong domestic demand.

Growth in the second quarter came in below expectations at 0.2 percent, preliminary data showed this morning.

One reason was a slowing in household spending growth - despite a more than 10 billion- euro package of measures launched by the government to boost purchasing power.

Many were looking at France as one bright spot in an otherwise downbeat eurozone growth story; although business investment is still holding up there, this morning’s figures may give some pause for thought.

UK Prime Minister Boris Johnson visits Wales today as part of a countrywide tour to win support for his "do or die" pledge to leave the European Union by Oct. 31.

Unlike Scotland and Northern Ireland, Wales joined England in voting for Brexit back in 2016; Johnson will also be buoyed by a new poll showing a rare lead for his Conservative Party over opposition Labour in the country.

His main pitch will be to Welsh farmers, promising they will get better support after Brexit.

MARKETS AT 0655 GMT

Sterling’s slide this week on UK PM Boris Johnson’s no-deal Brexit threats accelerated overnight.

The pound fell to a new 28-month low of $1.2120 in Asia trading – down 4.3% in July for its worst month since October 2016 – before stabilizing early in London.

Traders said a test of $1.20 was most likely in the coming days unless the political backdrop changed significantly.

Euro/sterling hit a high of 0.9189 cents – the weakest level for the pound since September 2017 – while sterling fell to its lowest against Japan’s yen since late 2016. Under-hedged markets are frantically pricing in what they consider a worst-case scenario for the pound as three-month options pricing starts to take in the Oct. 31 Brexit date.

Three-month sterling implied volatility has surged above 10% this week to its highest levels since just before the first aborted deadline for Brexit on March 29.

As strategists start to revise down forecasts for the pound and revise higher their probabilities for no deal, futures markets are pushing up the chances of a Bank of England interest rate cut by the end of the year.

The BoE is unlikely to shift its stance at Thursday’s meeting this week, but it will be forced to address the rising likelihood of a cliff-edge Brexit and how it would respond while trying not to undermine the pound further.

Markets are also increasingly sceptical the British parliament can stop a no-deal fracture on Oct. 31 if the European Union does not budge on its existing withdrawal agreeing.

Only a successful vote of no confidence in the government before then likely to keep Johnson from forcing an exit without a deal if he so chooses.

Even then, the chances of a snap UK election is hardly palatable for the pound.

Elsewhere, stock markets in Asia were relatively buoyant despite a minor retreat on Wall Street overnight as the Fed’s expected quarter-point interest rate cut is expected tomorrow night.

There was little reaction to the Bank of Japan’s decision to keep policy unchanged for now, but the BoJ insisted it would ease again "without hesitation" if the economy faltered.

With sterling so weak and only a quarter-point Fed rate cut now likely this week, the dollar was pumped up.

Its DXY index hit its highest since late May.

Euro/dollar was subdued but held well above $1.11.

Ten-year U.S. Treasury yields were steady just above 2.05% and Brent crude oil prices were up above $64.

European stocks opened slightly lower.

But, breaking ranks with its euro-zone peers, London’s FTSE 100 hit their highest in nearly a year and rose 0.4%, as the rout in sterling lifted its multinational constituents with big overseas currency earnings and BP reported strong earnings.

In corporate news, BP rose more than 3% after its underlying replacement cost profit, the company's definition of net income, exceeded a forecast of $2.46 billion, according to a company-provided survey of analysts.

British household goods maker Reckitt Benckiser reported lower-than-expected second-quarter sales, hurt by a slowdown in demand for infant formula in the United States and China, and cut its full-year revenue target. Its shares are seen down 2%.

Lufthansa shares are eking out small gains in early Frankfurt deals after reporting weak second-quarter results, as expected.

Earnings were hurt by price competition on short-haul routes in Germany and Austria as well as rising fuel costs.

Bayer has become the latest agricultural supplies company to be affected by flooded farms in the United States and by trade disputes, saying its full-year earnings target has become harder to reach.

Its shares are down 0.6% in early trade. Overnight, Toronto-listed fertiliser company Nutrien blamed the same problems for missing its quarterly earnings and cutting its full-year profit forecast.

Fresenius shares are up more than 2% after the German company raised its fiscal-year revenue target, citing solid second-quarter performance by all units, even though results of its key dialysis business came in below expectations.

Dialog Semiconductor's second-quarter revenue exceeded expectations, the latest European chip company to beat market consensus, but dealers said its outlook, which pegged third-quarter revenue below second-quarter levels and a decline in fiscal-year revenue, was disappointing.

Its shares are higher in pre-market trading in Frankfurt.

A look at the day ahead from European Economics and Politics Editor Mark John and EMEA markets editor Mike Dolan. The views expressed are their own. 

Editing by Larry King

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