Risk Aversion Generates Headwinds as Hurricane Irma Makes Landfall

Eurozone stock markets are mostly lower except for the Italian MIB as North Korea jitters and concern over the impact of Hurricane Irma weighing on risk appetite. Weaker than expected German manufacturing orders added to pressure on stocks, but has done little to give bond markets a boost. Germany’s 5-year Bobl auction saw very strong demand and falling refinancing costs as tapering speculation is being pushed out and geopolitical risks and a strong EUR are expected to see Draghi taking the foot off the accelerator with extreme caution. The Eurozone Retail PMI contracted in August and Australia’s economy expanded in the Q2

Eurozone retail PMI dropped back to 50.8 in August from 51.0 in the previous month. The headline number points to ongoing improvements in like-for-like sales, driven by a large extent by Germany, while the increase in France slowed down considerably and Italian sales continues to contract. Furthermore, sales continue to contract on an annual basis. All in all, some weakening and diverging cross country trends, with Markit reporting that “conditions in the euro area retail sector remain challenging”.

Germany’s Schaeuble says “everybody” wants rate normalization, while at the same time adding that central bank independence must be defended. Schaeuble also called Barnier’s stance on Brexit negotiations “appropriate” and stressed that the EU must keep together after Brexit, while warning that there will be “no free lunch” for the U.K. even if solutions to limit the damage from Brexit must be found. Nothing really new there. It is not the first time that Schaeuble has called on the ECB to end its ultra accommodative monetary policy and Bundesbank President Weidmann clearly is in agreement that QE should end as soon as possible. So far though, Weidmann hasn’t had much backing and it seems the strong EUR and geopolitical risks will keep the ECB on a very cautious path to the phasing out of asset purchases.

The Australian Economy Expanded in Q2

The Australia’s economy rebounded last quarter expanding by 0.8% in the Q2, up from 0.3% percent in the Q1. Despite the surge in economic growth, there is little signs of rising inflation generating spare capacity in the labor market which has allowed the Reserve Bank of Australia to leave interest rates unchanged and at record lows. The futures markets project no change in rates for the balance of 2017 and a 50% chance of a 25-basis point increase by June 2018.