July 2016

July 31, 2016 (Commerzbank AG) – What’s left of the Brexit shock?

Many economists have sharply lowered their forecasts for Germany and the euro zone after the British vote to leave the EU, being afraid of an uncertainty shock. But there is scant evidence so far of any uncertainty shock in the rest of the EU. Of course, weaker economic growth in the UK, as an important trading partner, will be felt in Germany and across the euro zone but the effect is likely to be much weaker than many forecasts presently assume. We outline the indicators which investors should look out for in the weeks ahead.

Further topics:

BoE Preview: Action stations

After the reduction in banks’ countercyclical capital buffer earlier this month, the MPC is expected to follow up with a cut in Bank Rate and we look for a reduction of 25 bps next week, taking it to 0.25%. But more QE might have to wait. Page 5

Outlook for the week of 1 to 5 August 2016

  • Economic data: The US employment report for July, due out next week, should support the Fed’s stance of leaning cautiously towards higher rates – which should also be vindicated by the release of PMI data. In Germany, orders likely continued their sideways trend. Page 8
  • Bond market: The focus next week will shift to the BoE. The most bullish of easing expectations are unlikely to be fully met but any potential disappointment should not have large negative spillovers into Bunds and US Treasuries. US Treasuries face fundamental headwinds from the ISM index and the labour market report for July. Page 11
  • FX market: After the Fed and BoJ decision the Bank of England meeting will move the FX market next week. A 25bp rate cut is very much expected. Page 12
  • Equity market: The German (nominal) export boom is over as the impact of the marked euro depreciation through to mid-2015 has faded. Corporate earnings growth should remain relatively moderate, which adds to the drag on the German equity market. Page 13
  • Commodity market: Commodity prices are moving in different directions. While gold and platinum prices are climbing, oil prices have been falling for weeks due to higher inventories and US production trends. By contrast gold is being driven by the bond market, which in turn is driving platinum metals which are also benefiting from decent car sales. Page 14


July 29, 2016 (Tempus Inc.) – The U.S Dollar is trading in much weaker ranges this morning following the Bank of Japan’s decision to withhold further expansion of its loose monetary policy. More importantly, second-quarter GDP growth for the U.S. registered at 1.2% falling way under the expected 2.5% estimate.

The Bloomberg Dollar Spot Index declined 1.5% in the last two days with a combo of lower chances of a Fed hike for the year, central banks staying put instead of using aggressive easing measures, and domestic indicators failing to show remarkable improvement.

University of Michigan Sentiment survey will be out at 10AM, which could turn out to be another sinking factor for the greenback if less than forecast. Good economic data out of Europe and the BOJ’s hesitation to aid the economy are likely to keep USD down throughout the day.


The Euro appreciated by 1.8% this week and is trading at its highest level in over a month. Market participants are eagerly waiting for the results of the stress tests currently ongoing on European banks to assess their financial health.
Nevertheless, a mix of poor performance in the U.S. and positive data out of Germany and Spain are pushing the Euro higher, although, there is potential for losses if the tests conclude banks are in a bad situation.

Spain’s unemployment fell to 20.0%, its lowest point in six years while German CPI satisfied expectations of some inflationary growth. The bank-test results will not be made publicly available until 4PM today.


The BOJ went against most economists’ bets on expanding the current quantitative easing program or cutting rates deeper into negative territory. As a result, the Yen is trading at its strongest level since the beginning of July.

Governor Haruhiko Kuroda decided to increase the bank’s purchase of exchange-traded funds (EFTs), but left government bond buying at JPY 80 trillion per year. Investors were hoping for more, but the BOJ, once again, did not deliver.

The IMF said the Yen happens to be trading at a fair value according to their assessment of currency fluctuations.
Deflationary pressures remain and the economy is struggling. We see a reversal still possible as Brexit issues take effect and intervention is more demanded moving forward.


July 27, 2016 (Tempus Inc.) – The Fed revealed their monetary policy decision today at no surprise to the markets, as the central bank took on a “wait and see” approach, saying that future rate hikes will be dependent on further improvements in U.S. economic data. Unlike previous meetings, there was no press conference after the announcement. In fact, Chairwoman Janet Yellen will not speak to the public until August 26 during a conference for the Kansas City Fed in Jackson Hole, WY.

The USD weakened as a result of the Fed’s decision. It’s likely the Fed will remain cautious of taking any action, despite of better than expected job creation and other recent positive data. Durable Goods were released earlier with worse contraction than expected in June and revised deeper into negative territory for the month of May. The actual (-4.0%) number is twice as bad as the estimated (-1.4%), signaling continued decrease in long-term expenditures. Stock indexes across the globe welcomed the news climbing by an average of 1.5% in Europe and Asian sessions.


The Pound remains volatile to post-referendum data and uncertainty over Brexit negotiations, but its decline slowed down after GDP numbers revealed better-than-expected growth. The second quarter of 2016 saw the U.K. economy grow by 0.6% over the forecast 0.5%.

Fortunately, the U.K. economy has grown for three consecutive years, but Sterling is not on the rise because economists credit the resiliency to Britain being part of the European Union. Subsequently, analysts feel this 3-year run may come to an end as recessionary pressure is building up with already disappointing consumer as well as business confidence after the seismic vote.


The drama in Japan before the Bank of Japan decision goes on as initial details on a fiscal spending are finally in place. Prime Minister Shinzo Abe stated that JPY 28.0 trillion were in the works for stimulating the export-driven economy. The plan to help and be aggressive like the BOJ comes at a good time when the Yen is hurting companies dependent on competitive prices for their exports.

JPY recuperated a bit from losing as much as 1.5% of its value overnight. Traders are increasing bets that the BOJ will indeed feel comfortable expanding its sovereign bond buying program on Friday. The reversal we’ve predicted for USD/JPY may be brewing.




July 26, 2016 (Tempus Inc.) – The U.S. Dollar is holding on to recent gains against its European counterparts, but fell to the Yen and Oceanic currencies with less likelihood of stimulus expansion in Japan. The Asian trading session was a mix of 2.0% losses to the Nikkei Stock Exchange and upticks to the rest of the equity indexes. NZD is up on tremendous growth in home mortgage lending while AUD strengthened off of a major USD selloff after commentary out of the Japanese finance ministry. Both resource-based currencies are up by an average of 4.0% since the end of May.

The “loonie” and Peso continue to slide along with the weakness in oil prices. WTI Crude Oil fell below $43.0/barrel as production keeps increasing in North America and the OPEC members. CAD is trading around its worst levels since the end of March.

Expect some risk-aversion to keep markets from flourishing ahead of the risk events at the end of the week. More economic data out of the U.S. including PMI, Home Sales, and Consumer Confidence will hit the wire at 9:45AM. Expansion is expected and perhaps better-than-expected figures could push the greenback in a positive direction.


The Pound mounted a comeback overnight after falling by over half a percent overnight on news that Bank of England members will push for aggressive stimulus at the meeting next week. In particular, remarks from BOE policymaker Martin Weale pushed Sterling downward as he considers Brexit led to a “dramatic deterioration” of U.K. economic indicators.

The statements mark a change in sentiment from last week when Mr. Weale cast doubt on the Brexit having enough negative impact to merit additional easing measures. GBP may have recovered, but this highlights its never-ending vulnerability as officials figure out steps to curtail a slowdown that could lead into a recession.


Finance Minister Taro Aso downplayed the BOJ’s will to expand current stimulus and caused the Yen to have its best day since the Brexit. The Yen’s stubborn run continues as exporters struggle, stocks fall, and the chances of action by central bank officials wane. Aso was believed to agree with coupling monetary efforts with fiscal spending, but it seems like there is no coordination and no detailed plan for government spending to grow. JPY is now 16.0% stronger since the start of 2016.

We still believe there is potential for a reversal in Japan’s fortunes as lack of growth forces the BOJ steady hand and Abe to start working on re-building projects. The export-driven economy will not tolerate such an imbalance in currency fluctuation.

July 24, 2016 (Commerzbank AG) – Understanding the Fed: Four lessons for investors

The Fed will not increase interest rates next week. But after the toing and froing in recent communications, the course ahead is not that clear. We illustrate what lessons are to be learned from the Fed’s tactics. Firstly, we should not read too much into the FOMC statement. Secondly, public remarks by most regional Fed presidents can be safely ignored, the decisive figures are the board members. Third, it all depends on the data and fourth, the Fed only raises interest rates when markets are calm. We still expect a rate hike towards the end of the year.

Further topics:

Turkey: The economy after the attempted coup

Political uncertainty after the failed coup attempt will have economic consequences, and we have further reduced our growth forecasts. Page 5

Outlook for the week of 25 to 29 July 2016

  • Economic data: The euro zone economy probably expanded in Q2 at a considerably slower pace than in the first three months of this year. This will not please the ECB, nor will the renewed decline of the core inflation rate in July. The US economy, in contrast, regained momentum in Q2 after the weak winter half-year. Page 8
  • Bond market: With Fed rate hike speculation having returned and the ECB poised to reassess its QE programme in September, this leaves the long-end of the Bund curve vulnerable. We see scope for the latest steepening of the yield curve to extend. Page 11
  • FX market: In the coming week, the Fed and the Bank of Japan will convene for their policy meetings. These will essentially determine further developments in USD and JPY exchange rates. Page 12
  • Equity market: Even those DAX companies which have considerable UK exposure have seen a sharp price recovery following the Brexit decision. With negative Brexit effects only expected on a medium- to long-term perspective, if at all, the DAX should continue fluctuating around the 10,000 mark in the near-term. Page 13
  • Commodity market: In the absence of new data and ever decreasing activity among market participants in mid-summer, commodity prices are likely to move sideways. Gold prices will continue to be impacted by greater risk appetite among investors. Page 14

July 21, 2016 (Tempus, Inc.) – The U.S. Dollar remained mostly muted throughout the night with global markets staying quiet ahead of the ECB decision. As expected, the European Central Bank announced that its current interest rates and quantitative easing will stay the same for now. The lack of action in loosening policy follows the same line of thinking adopted by the Bank of England post-Brexit, which is to watch for more indicators signaling negative effects.

Thus far in his press conference, ECB President Mario Draghi commented on the need to couple monetary policy with fiscal spending, echoing the same message to Euro-zone governments that the Bank of Japan has manifested recently. Draghi feels the central bank has acted in a way that provides resilience to market shocks; however, Brexit has downgraded the growth outlook for the region. USD is slightly weaker since the remarks were made.

Initial Jobless Claims came in lower than expected along with a decline in continuing Claims, cementing the labor market’s steady improvement. Existing Home Sales will be out at 9:45PM, we will see if positive domestic numbers can move the needle in the greenback’s favor.

Draghi said the ECB is ready and willing to act in later months if needed, a reversal from his statements back in March when he said further cuts would not be considered.


Sterling fell after poor sales data and pessimistic outlooks from traders. U.K. Retail Sales declined 0.9% in June, dropping more than forecast and representing the steepest fall in six months. The figure shows that many feared the uncertainty over Brexit and statisticians worry the effect on sales may be worse once post-Brexit numbers are out.
Furthermore, analysts surveyed by Bloomberg predicted that Britain is headed towards its first recession since 2009 as economists foresee loss of investment with the process to break up being delayed. GBP volatility remains at high levels as outlooks continue to tilt downward.


The Yen climbed by the most in over a month after a BBC Radio interview with BOJ Governor Haruhiko Kuroda revealed that the central bank leader is not willing to look into “helicopter money.” The establishment of bond purchases directly from the government by the BOJ without having to enter the market does not seem to excite the official.

However, there was confusion in Japan after it was pointed out that while the interview was broadcast yesterday, the piece was recorded back in June, before Bernanke and Kuroda met to discuss the monetary strategy. Adding to the Yen’s surge is commentary from Japanese finance experts that the BOJ should start considering curtailing the stimulus program.

July 20, 2016 (Tempus Inc.) – The U.S. Dollar gained overnight, primarily against commodity-based currencies as global markets take a backseat in anticipation of the European central Bank’s decision tomorrow. The risk event will start making its impact tomorrow at 7:45AM EST. Equity markets stayed relatively quiet, but European shares had a slight uptick as many investors feel easing measures will stay in place in the long-term and additional aid may be on the way very soon. Unlike the Fed, the European Central Bank’s actions are not easily predictable, but we believe along with most economic analysts out there that the tone will be quite dovish.

There is no major data today, but keep in mind that domestic figures have impressed lately. Although the current global economic situation begs for close monitoring, intervention, fiscal spending, and monetary accommodation, there is optimism that in the next six months enough momentum can be achieved to put focus back on tightening. Odds of a Fed hike now stand at over 45.0% by end of the year. USD is at its strongest level in one month, per the BBDXY.


Although the Pound declined by as much as 1.7% since Monday because of downgrade outlooks on the U.K. economy post-Brexit, there were good unemployment news pulling the currency back up. British unemployment registered at 4.9% according to Q2 numbers, the lowest jobless rate since 2005. Indeed, the figure comes from pre-Brexit analysis, however, the Bank of England’s Agents’ Summary of Business Conditions showed no evidence to conclude any significant slowdown economically yet. This survey is the equivalent to the Fed’s Beige Book, which noted confidence is certainly down, but businesses still expect some gradual growth.


The Euro is trading around its weakest levels in three weeks ahead of the ECB decision announcement slated for tomorrow. A report revealed that the Euro-zone’s current account surplus shrank in May. Most economists feel that the ECB and BOE will take similar paths as they prepare their forecasts and wait to add further stimulus. The wait-and-see approach is likely not going to be long-term.

We believe they will not make any moves tomorrow, but certainly feel strong about President Mario Draghi indicating that further action must be taken within the next quarter and before we get close to the end of the year. The fallout is not entirely clear in the horizon, but Brexit effects will need to be countered before potential tensions negatively affect growth. A recession is not guaranteed, but remains likely with 0.5% of Euro-region growth already compromised, per ECB commentary.

July 16, 2016 (Tempus Inc.) – The U.S. Dollar floundered thus far this week despite improved economic indicators with losses across the board resulting from days of voracious risk-appetite. Global markets needed the boost following the post-Brexit disarray that saw as much as $3.0 trillion in losses. Fundamentally, the economy of the U.K. has not seen any effects and the establishment of a new government in parliament helped ease doubt on the U.K.s ability to find a way forward.

The future of trade negotiations between the European Union and the U.K. is still uncertain, so there is room for the greenback to gain in the long-run if the communication between the two parties deteriorates along with economic growth as the year goes on. The Bloomberg Dollar Spot Index is 2.0% up since June 24th.

Commodity-based currencies have seen a tremendous surge since the Brexit vote, correlating with the positive trend in the prices of resources. MSCI Emerging Markets are up over 9.0%, confirming that investors are looking for options outside of established advanced economies. Additionally, China’s GDP for Q2 of 2016 climbed 6.7%, exceeding expectations and further advancing developing markets. Currencies such as AUD continue to appreciate, already up 4.2% since end of June.

American data is once again exceeding forecasts with CPI and Retail Sales impressing this morning. While Consumer Prices fell in line with the 0.2% rate of growth, Retails Sales registered a 0.7% uptick, double the predicted 0.3%. Traders seem to mostly doubt any chance of a Fed hike regardless of the steady progress. Odds now stand at just 35.0% for an increase by end of the year.


The Pound is stronger this morning after the Bank of England’s decision yesterday painted a calmer picture of the U.K. than the one we grew accustomed to in the last three weeks. Prime Minister Theresa May sent a message of hope when she first spoke to the press and vowed to fight towards economic fairness for everyone of any background, sending a message of tolerance through the airwaves.

Since June 23rd, reports of hate crimes in the U.K. increased by 42.0%, revealing a dark side of England that the government seems to truly regret. The post-Brexit drama will definitely continue, but this week was a good one for the U.K. in which faith was somewhat regained and new order of business is the mentality going forward.


The Japanese Yen fell another half a percent overnight, making this the worst week for the Yen in 17 years. Bernanke visited Japan to suggest ways that the BOJ and fiscal policy can coexist. There is talk of “helicopter money,” a concept in which the central bank would buy up government debt without going into the market to do so.

Bonds under this condition would only be available to the BOJ, allowing it to inject more money supply into the economy. JPY is down 5.0% since this week began and the interventionist tone became the norm.

July 14, 2016 (Tempus Inc.) – The U.S. Dollar lost ground overnight as stock indexes and commodities continued their strong resurgence, which has erased most of the losses experienced in the post-Brexit world after the initial negative reaction.

Theresa May wasted no time in putting together a cabinet after taking over the Prime Minister role, Japan is listening to economic advice to turn things around, and America’s indicators are better than expected. The mighty “buck” is no longer appreciating on the basis of market fear as a safe-haven, nevertheless, volatility remains high and risk-aversion has not completely faded.

Jobless Claims were expected to be higher than last week, but the figure was the exact same as the prior reading. Economist forecast 265K additional claims, but the reading was at 254K. Producer Price Index also beat lower expectations increasing in June by 0.4% over the predicted 0.1% rate of growth. Accommodative policies around the globe are likely to remain in order to see the ongoing improvement.


The Bank of England decided to maintain its current interest rate at the record-low 0.5% pushing the Pound upward as it strengthened by over 1.5%. The current level is more 1986 than 1985. The uptick was no surprise as a result, but the BOE’s Monetary Policy Committee is expecting looser policy in the month of August.

Central bank officials are still working on updating their forecasts and regardless of the positive move for Sterling, members agree on a downgraded outlook for economic growth. Uncertainty still has a hold of the economic future and many easing options were discussed at the table.

PM Theresa May appointed a new Chancellor of the Exchequer immediately after taking over Westminster Palace. Welcome Philip “Box Office Phil” Hammond, a man described as “not particularly inspiring, but a safe choice.” The man with the best financial title in the world recognized that markets were rattled after the referendum and he would do “whatever measures” to rebuild confidence in the U.K.


The Euro strengthened overnight and is now 1.5% better since originally falling after the June 23rd vote. The spike is counter intuitive to the Euro-zone’s general weakness as an economy. Economic data is not stellar, in fact, it’s worsening.

Industrial production in the euro-area fell by 1.2% in May, completely eradicating the 1.2% rise seen in April. Also, French Consumer Price Index increased by less than expected, signaling that inflationary growth is still muted.

However, Unemployment figures have improved, European stocks are on a winning streak, and the Euro does not drop despite ECB desires to do so. We believe there will be a reversal as we get to the second half of 2016 because it’s clear the recovery is slow and the Italian banking crisis will not bode well for the shared currency.

July 10, 2016 (Commerzbank AG) – Italy’s banking system with its many non-performing loans is moving into market focus again. Investor bail-in is just as unlikely as broad-based state aid. Instead, Italy will probably continue to muddle along. Other countries in the euro zone are also shying away from a big clean-up of their balance sheets, which will further dampen the economy and entice the ECB towards a loose monetary policy. What is more, Italy’s avoidance of EU restructuring rules is symptomatic of how EU rules are being handled.

Outlook for the week of 11 to 15 July 2016

  • Economic data: A wide range of US economic indicators are due out next week. We expect the data to confirm the picture of moderate expansion with a slight rise in inflation pressure. Euro zone manufacturing is likely to have fallen considerably in May, confirming that strong economic growth in the first quarter was an outlier.
  • Bond market: The UK referendum is the catalyst uncovering several deficiencies in the EU policy setup, which have fuelled a pronounced leg of global risk aversion. UK property funds and Italian banks are in the spotlight and the flight to quality pushes an increasing share of German Bunds beyond the boundaries of QE purchases.
  • FX market: Last week we discussed the negative implications of the Brexit referendum for the pound. This week we look at the currencies that benefit from the continuing flight to “safe havens”: the yen and the Swiss franc.
  • Equity market: Corporate acquisitions year-to-date are down markedly from – an albeit strong – 2015. This is above all due to equity market weakness, whose sustained recovery was the key factor driving M&A activities in the past.
  • Commodity market: Oil prices should continue to hover around the $50 per barrel mark with the energy agencies likely to confirm a largely balanced market. Base metal prices, on the other hand, are at risk of falling because of disappointing Chinese economic data.