First signs of hope

Italy introduces more ambitious reforms, SNB is getting serious about the franc and the data from US are better than expected – is this the end of the turmoil. Not necessarily – fiscal problems remain huge and investors will need to adjust to quarters of a slower growth. Yet without a doubt (just like the it ignored risks for a longer while) the marker overreacted within the last two weeks and some correction is likely to happen.  

Equities – claims fall below 400k

Initial claims fell below 400k threshold for the first time since late March, confirming that an unusual and unexpected slowdown on the labor market in the spring was temporary. It also confirmed our view that while the US (and global) economy has slowed down, it is not crashing. That is an important message: another recession would deal serious (and in some cases fatal) blow to public finances.
A slowdown – while challenging – might be managed with a combination of tighter fiscal and expansive monetary policy.

The data helped turn around markets yesterday and S&P500 futures rallied from ca. 1100 pts. to as high as 1170 pts. and 1155-1160 pts. today at the European opening. That might not be the end to the (downward) adjustment but for now we have a hammer on the weekly and if investors see the trajectory diverging from 2008 (when we had two consecutive huge black candles), they might be encouraged to buy cheaper equities and drive the market higher in a corrective movement.

EURCHF – SNB fully determined

The SNB finally managed to push the EURCHF a bit higher – significantly off the parity yet still very far from the comfort level (we see the fundamental rate at least at 1,35, so the Bank probably wouldn’t be happy with anything less than 1,25). Obviously improved sentiment helped but investors might get scared seeing that even though the SNB failed to organize a coordinated intervention, it remains determined to move the pair higher. Among many measures, the concept of a temporary peg to the euro might look especially scary for the CHF bulls. That is because the peg would be most likely set at levels much above the current market rate causing automatic loses to the CHF long positions. Obviously the prospect of introducing such a dramatic move is very remote. It would most likely require an agreement with the ECB and massive interventions on the market. Yet a mere fact that the SNB is considering such radical steps has discouraged the CHF bulls – at least temporarily.

Similarly like on S&P500 we have an optimistic hammer candle on the weekly which could herald an upward correction. In case of EURCHF the first resistance is at 1,14.

Events to watch – US retail sales

US retail sales in the key figure today (8.30 ET, 14.30 CET, consensus +0,5% m/m and +0,2% m/m for the core). The sales rose by mere 0,3% q/q in the second quarter which was evident in the GDP data and caused fears that what was expected to be a recovery driver could become a drag. A flash UM sentiment index (9.55 ET, 15.55 CET, consensus 63 pts.) will be released later.      

Przemysław Kwiecień PhD, Chief Economist

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