Hawkish Tone and Delay of Health Care Vote Undermine Stocks

Global stock markets remain under pressure, with equities continuing to slide, after a largely negative close in Asia. The Nikkei had lost 0.47% at the close, the Hang Seng was down -0.61%, while the ASX managed to outperform with a 0.73% gain as oil prices held slightly above USD 44 per barrel. The Canadian dollar surged Wednesday following an interview on CNBC by BoC Governor Poloz. In Europe, the DAX is down -0.67%, versus a -0.18% loss in the FTSE 100, as the stronger EUR is underpinning the underperformance of the DAX and markets continue to adjust to Draghi’s hints at policy changes ahead. Draghi’s remarks, coupled with comments from Yellen last night, which didn’t suggest that the Fed’s plans to gradually remove stimulus have been altered reinforced the view that investors are facing a phase of gradual tightening. The U.S. decision to put off a vote on a health care overhaul also added to pressure as investors fret about a possible political gridlock.

Canadian Dollar Surges Following Poloz Interview

The Canadian dollar is the strongest of the majors following an interview on CNBC with the Bank of Canada Governor Poloz who gave an upbeat prognosis of the Canadian economy, where he said that a rate hike needs to be “at least considered.” He said, “We have had over six months of pretty steady, and in fact in the first quarter, really strong growth, surprisingly so… We do think it’s going to moderate from there, not to slow down dramatically but to be more normal on pace, but still above potential.” He noted that the economy is “absorbing excess capacity that was built up in the wake of the crisis and then builds up again in the wake of the oil shock a couple of years ago.” Poloz also said that upcoming NAFTA renegotiations have been a headwind as businesses have held back investment decisions.

Italian HICP inflation fell back to just 1.2% year over year in June, from 1.6% year over year in the previous month. Base effects continue to play a role and transport costs, which include petrol prices, rose 3.0% year over year, a marked deceleration from the 3.7% year over year in the previous month. The ECB already scaled back its inflation forecast on the back of lower oil prices at the last meeting and while the Italian number points to weaker than expected Eurozone headline rates in June, this doesn’t change the prospect of ECB tapering next year, although the data will back Draghi’s call for prudence and cautious moves as the central bank starts to scale back support.