Australian dollar dumped as European recession intensifies

See the latest Australian dollar analysis here:

Macro Afternoon

DXY was firm again last night. EUR is breaking down and CNY was firm:

The Australian dollar was universally dumped:

Gold held on:

Oil let go as Kuwait and Saudi ramp up the Neutral Zone:

Metals partied:

As miners crashed with iron ore:

EM stocks were stable:

Junk jumped:

As Treasuries were bid:

Bunds went mad:

Aussie bonds are right at a new breakout:

And the Nasdaq is flying free:

Driven by semis:

Europe is crashing towards recession as its externally led growth model is bashed by the Chinese and global slowdowns. Flash PMIs were all worse than expected:

▪ Flash Eurozone PMI Composite Output Index(1) at 51.5 (52.2 in June). 3-month low.

▪ Flash Eurozone Services PMI Activity Index(2) at 53.3 (53.6 in June). 2-month low.

▪ Flash Eurozone Manufacturing PMI Output Index(4) at 47.0 (48.5 in June). 75-month low.

▪ Flash Eurozone Manufacturing PMI(3) at 46.4 (47.6 in June). 79-month low.

The internals are worse:

Pricing power is gone:

The WSJ summarises is elegantly:

The European Central Bank has convinced financial markets that it will act. The question is, among its grab bag of possible moves, will it do more than investors expect?

The central bank meets Thursday with expectations high that outgoing ECB President Mario Draghi will push to ease policy—or at least promise that it will do so in coming months. Markets have responded by sending bond yields into deeply negative territory.

…But riskier assets like cyclical stocks or lower-rated junk bonds haven’t rallied. Investors still seem to doubt whether the ECB can boost the eurozone economy when its weakness has more to do with China and global trade than domestic demand.

“Investors are buying the return of loose policy, but they aren’t buying assets linked to growth or inflation,” said Alberto Gallo, head of macro strategies at fund manager Algebris. “Markets are pricing that there will be more QE, but that it won’t work.”

In my experience, when markets begin to think that way, Super Mario over-delivers.

Don’t forget that, as well, that Europe still has to deal with Brexit. BoJo is stacking his cabinet with Brexiteers and he has every incentive to go after it as Nigel Farage eats his party. As things stand, Brexit will happen automatically on October 31 if nothing changes. Sure, there may be a European extension but what does that deliver BoJo politically? Why would he want it?

There are still technical difficulties in the hard Brexit, previously argued by Anatole Kaletsky:

With May gone and Boris Johnson or another fervent Europhobe almost certain to succeed her, could the prime minister find a way to bypass Parliament and unilaterally impose a no-deal Brexit?

A truly determined Brexiteer could have two ways of achieving this. He or she could trigger a general election and win an outright parliamentary majority, or else try to block parliamentary efforts to force an extension of the Brexit deadline.

On closer inspection, however, these options are also highly implausible. The idea that a new Tory leader – especially one as ambitious as Johnson – would jeopardize his lifetime goal and risk becoming the shortest-serving prime minister in history by calling an election before October 31 is a non-starter. The next British election probably will be held well before the constitutional deadline of summer 2022, but any new prime minister will want to show some achievement (especially on Brexit) and restore the Tory’s abysmal poll ratings before taking this risk.

A similar precautionary principle will block the last possible route to a no-deal outcome: a new prime minister deciding somehow to bypass or overrule parliament. Even without any change in parliamentary procedures, there is a clear mechanism to prevent a prime minister from defying a majority of MPs: the opposition can call a vote of no confidence anytime. After recent Tory defections, only five or six additional rebels would be needed to bring down the government and force the general election that the new prime minister would be desperate to avoid.

Fanatical Brexiteers argue, however, that a prime minister genuinely determined to deliver a no-deal Brexit could, and should, go nuclear: suspend parliament and refuse to call MPs back until after the October 31 deadline, when Brexit will happen automatically under current law. If you believe that the UK is turning into Zimbabwe or Venezuela, you should expect a no-deal Brexit. Otherwise, forget about it.

Hyperbole aside. This is no longer implausible. All BoJo has to do is look busy, like he’s trying to prevent it with a better European deal, and then throw his hands up October 31 and declare that “I tried”.

It will still come as a shock to Britain:

With considerable economic fallout mitigated by a much lower GBP:

But the real risk is some kind of financial dislocation and contagion as Europe crashes into a recession that craters the EUR, sends DXY to the moon, and slams the brakes on the global economy.

In that event the Australian dollar will head swiftly towards the 0.50s.

David Llewellyn-Smith
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  1. Know IdeaMEMBER

    I do so like it when you paint such a rosy picture.

    The option of Boris looking like he is doing everything, while not achieving anything (the holy grail for a politician) seems the most plausible.

    • His achievement is likely to be the disintegration of the UK. The Scots are fed up to their eyeballs with the English elite and are chafing at the bit for a second independence referendum.

      • DominicMEMBER

        Lol. The referendum failed the last time because the Scots all thought they’d lose their welfare. If they wish to leave, the Poms would be delighted given the massive contribution those south of the border make towards the welfare millstone just north of them.

      • That is true, but England’s great economic driver is the City of London, and in no small part London is the financial centre of Europe because of membership in the EU. When the UK leaves, a lot of that will be going, and the UK is no longer the industrial super power it once was, so why remained tied to a sinking ship?

      • Know IdeaMEMBER

        Whereas Europe’s economy is as safe as the Titanic. Much better to be tied to that? To do would also save you having to worry about lifeboats and other safety equipment that is provided by being part of a (British) democracy.

      • Know Idea, the City of London makes a killing by being Europe’s financial centre. It is the main source of foreign earnings, even ahead of the dwindingly North Sea oil.. As soon as they leave, do you think the EU is going to give them the same privileged access they currently have? But I suppose they could fall back on their huge manufacturing strength…..oh dear

      • Know IdeaMEMBER

        I don’t disagree that there will be financial and economic pain to deal with as Brexit rolls on. But when do you get to a point where that pain is worth it as it allows you to retain sovereignty rather than being directly subservient to foreign oppression?

      • Depends on which “oppression” you’re talking about? Brussels or London? At the moment the workers are benefiting from the lower immigration from the EU, but if you look at the stats, immigration from the ex empire third world is growing rapidly. The English elite have absolutely no intention of sharing the pain with the “ordinary” people.


    Before you poo poo me with abuse give me 6 months pls
    GFC occurred right on the low of solar cycle 23, solar cycle 24 bottoms in Q1 2020
    NASA has said solar cycle 24 is the fastest decline in recorded history
    It’s important to have an open mind in any analysis

    Global economic slow down, European banking crisis, contagion, European Gov Sov bond default similar to 1931 that will spread throughout the world, will it drag our Aust banks under, my guess within 12 months its a very high possibility some of our banks will fold

    Don’t be surprised to see DXY above 150 in next 2 or so years

      • TTW,
        You are probably right, what would the ancient Egyptians, Greeks, Mayans etc know.
        You are better off getting all your education from David Koch on Sunrise 7
        “Buy a house in the suburbs with a hills hoist and get rich”

    • DominicMEMBER

      “Don’t be surprised to see DXY above 150 in next 2 or so years”

      Not if ‘The Donald’ has anything to do with it …

    • desmodromicMEMBER

      No abuse, just puzzlement. I can understand a link between sun cycles and the weather and other physical phenomena but can’t see a link to markets. Unless the weather affects peoples’ buy/sell strategies, or we run out of water, or the crops fail, or ….?

    • bcnich, at least you think independently.
      There are too many subscribers who read articles from well known commentators/investors, and then take it as fact.
      They can’t think for themselves.
      I think that you are writing rubbish about the solar cycle, but if you are right, I will be the first to congratulate you.
      Mind you, weakness in the world economy is due to a range of factors (e.g. excessive debt levels) and nothing to do with the solar cycle.
      You are certainly coming from a different direction.

      • Andrew
        I don’t think what i am writing is the sole cause. I have begun to believe that things are interconnected. I do believe to some extent, that all these things are some how interconnected. I certainly don’t think to the point that a brick thrown off a overpass into a car window is part of some plan. But I believe that human behaviour is effected in some part by all these things.
        Yes I agree on the debt etc.
        I just like to look at things from a more broader perspective.
        I think everything is worth a consideration.
        We are all just guessing and I am the first to admit if I am wrong on my view.
        The best traders I ever worked with are those who admit they are wrong and are willing to change view direction.
        So i’d say to you if the pissy moon can move oceans (which is widely accepted, No??) how can’t these other things not play some part.
        It’s very important to have an open mind.

  3. DominicMEMBER

    The good news here is that at least the ECB have plenty of monetary fire power left in the locker. Oh wait …