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More negativity

More negativity

UK PMI services surprised to the downside yesterday coming in at 51.1 in August against consensus of 54. Importantly the reading still showed expansion even if the contraction was more than expected. It has also been noted that the UK riots may have been responsible for half of the fall in August. Sterling weakened against the USD after the reading, but, this was more to do with the ‘risk off’ sentiment gripping the markets yesterday, hence why the Euro traded relatively flat against Sterling. Asian equity markets continued the negative run following Monday’s pummelling of European banking stocks amid the ongoing mix of negative news on Europe’s debt crisis and deteriorating global economic data. The crisis of confidence on Europe appears to be coming to a head as the Italian upper house starts a vote today on its much criticized EUR 45bn fiscal package (result likely early Wednesday). A German constitutional court ruling Wednesday on whether Berlin broke any laws by contributing to current and past Euro Zoe bailouts adds to the uncertainty. The vote potentially complicates Germany’s ability to increase the European Financial Stability Facility (EFSF) – itself set for a vote on Sept 29. Today’s session is expected to see no let up in the negative mood given the factors at play, though US August factory orders data at 1500 BST will be key for sentiment. The flash estimate suggests that eurozone GDP grew by 0.2% in the three months to June, a similar pace to that seen in the UK. Of course the eurozone slowdown needs to be seen in the context of Q1’s 0.8% growth rate, which leaves the economy on track to grow by just under 2% over the year as a whole. We should get the entire expenditure breakdown with this release and the market is looking for household spending to fall on the quarter, which provides the main slowdown along with softer business investment. German factory orders are extremely volatile, but they will give us an indication on the likely direction of industrial production. The expected 1.0% fall in July would still leave orders up by some 10.3% on the same month a year ago. While it looks as if the German economy will match Q2’s 0.1% pace in the third quarter at the moment, the economy is still growing, and we still have hopes that growth will reach 3% over the year as a whole. The headline ISM non-manufacturing index tends to follow core retail sales, though recently the ISM has undershot. The consensus is expected to slip to 51 from 52.7. Crucial for how markets take this will be whether the index remains above the 50 expansion/contraction level.

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