Brexit puts squeeze on central banks to fix financial jitters
Under heavy pressure to react to the June 23 vote, both the Bank of England and European Central Bank expected to provide more stimulus, and analysts believe they’ll deliver.
“After the Brexit shock, Europe is one step closer to a persistent 1% growth, 1% core-inflation economy,” analysts at Bank of America Merrill Lynch said in a note Monday.
The region can’t sustain those levels in the long run, either politically or socially, given its high unemployment rate and poor productivity development, they added.
That doesn’t mean, however, that the ECB won’t introduce more easing to the eurozone economy, to soften the Brexit blow. The B. of A. analysts expect the central bank to bring forward its stimulus actions, and they see policy makers using their July 21 meeting to deliver “serious” hints of hard moves in September.
Investors may get a hint of what’s coming when ECB President Mario Draghi speaks in Frankfurt on Wednesday at 9 a.m. Central European Time, or 3 a.m. Eastern Time.
Further easing could come in the form of extending the ECB’s bond-buying program beyond March 2017. Governor Mario Draghi and team could also abandon the capital key, which determines how many bonds from each country it can buy under the QE program, they said.
Other investment banks — including Citigroup, J.P. Morgan and Deutsche Bank — agree that the ECB is likely to strike a more dovish tone at its July meeting, prompted by the Brexit vote.
Brexit triggers series of GDP downgrades
For the Bank of England, however, a rate cut almost seems inevitable, analysts said. Concerns over the future of the U.K. economy post-Brexit have been a key topic since the referendum was announced in February. Since the ballot in June, GDP forecasts for the country have been consistently slashed.
B. of A. said it now expects three quarters of recession in the U.K., starting in the third quarter of 2016. It cut its GDP forecasts to growth of 1.4% in 2016 and 0.2% in 2017, down from previous forecasts of 2.5% for both. The bank also revised its 2017 eurozone GDP forecast down to 1.1%, from 1.6%.
Citigroup sees U.K. growth of 1.3% for 2016 and 0.9% for 2017, down from 1.7% and 2.1% respectively, while J.P. Morgan forecasts a slowdown in 2017 to 0.6%, from 1.1%.
China service sector activity jumps to 11-month high: Caixin PMI
Activity in China's services sector rose to an 11-month high in June, a private survey showed on Tuesday, diverging from struggling manufacturing in a trend that if sustainable would indicate Beijing is making progress in rebalancing the economy.
However, a composite measure of activity fell to a four- month low, highlighting that a growing services sector may not be able to make up for a prolonged decline in the industrial economy that has pushed China's growth to 25-year lows.
The Caixin/Markit services purchasing managers' index (PMI) for June rose to 52.7 from 51.2 in May on a seasonally adjusted basis. Readings above 50 indicate an expansion on a monthly basis, while readings below signal contraction.
Beijing has been counting on a strong services sector to pick up the slack as it shifts the economy towards stronger consumption and away from a dependence on heavy industry and manufacturing exports.
"Service sector growth is now supporting the overall economy, and the expansion for services is coming at a time when the manufacturing index is contracting, suggesting the nation’s economic structure is becoming more balanced," said Zhengsheng Zhong, Director of Macroeconomic Analysis at CEBM Group.
OPEC Crude Production Rises in June Led by Gains in Nigeria
OPEC’s crude production increased in June as Nigeria raised output following repairs to some infrastructure that had been damaged by militant attacks.
OPEC pumped an extra 240,000 barrels a day last month
Nigeria pumped an average 1.53 million barrels a day last month, a gain of 90,000 a day from May, according to a Bloomberg survey. The West African country was able to repair some pipelines after agreeing a cease-fire with rebels.
Production in Saudi Arabia, the world’s biggest crude exporter, rose to 10.33 million barrels a day, a monthly gain of 70,000 a day. The kingdom typically boosts output in summer months as it burns more crude to generate electricity to power air conditioners.
Brent Oil Falls Below $50 After Nigeria Boosts Crude Production
Brentcrude sunk below $50 a barrel as estimates showed Nigerian production rose last month following repairs to infrastructure that had been damaged by militant attacks. Futures in London dropped as much as 1 percent after slipping 0.5 percent Monday.
Reserve Bank of Australia stays pat, as expected, after tight election
The Reserve Bank of Australia (RBA) conserved its ammunition at Tuesday's policy review, as widely expected, despite renewed doubts over the economic outlook following an inconclusive election.
In an official statement, the central bank said it left its key cash rate unchanged at 1.75 percent, citing low inflation and overall decent economic growth, leaving the door open to looser policy if needed. While the statement made no mention of domestic politics, strategists say last weekend's election played a major role behind Tuesday's decision.
"The inconclusive result of the weekend's elections will place another period of political uncertainty for Australia, which means markets will turn to the next meeting in August, where another 25 basis point (bps) cut to 1.5 percent is at the top of the agenda," said IG market strategist Bernard Aw.
Reference: CNBC,Bloomberg,Reuters,MarketW
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