Spain election delivers inconclusive outcome

OVERNIGHT

Equities across Asia are trading mixed ahead of a number of major central bank policy decisions this week. Stocks in Japan are higher this morning boosted by Friday’s reports that suggested Bank of Japan officials saw little urgent need to rethink the current ultra-loose monetary policy stance. The results of Sunday’s election in Spain saw neither main party – PP or the Socialists – fall short of the 176 seats needed for a majority in the 350-seat congress. The inconclusive outcome has weighed on Spanish equity futures with political analysts pointing to the prospect of another election later in the year.

THE DAY AHEAD

Ahead of key central bank announcements from the US Federal Reserve, European Central Bank and Bank of Japan in the coming days, preliminary PMI data for July due today will provide timely updates on economic momentum in the UK, Eurozone and the US. All three are likely to show a considerable gap between struggling manufacturing sectors and service sectors that are still growing. However, the composite PMIs for the UK and US are forecast to again be above 50 signalling ongoing expansion whereas the Eurozone index is predicted to be below the 50 expansion level for the second month in a row.

For the UK, we expect both manufacturing and services momentum to have eased further in July, with the former forecast to register a 12th consecutive sub-50 reading, consistent with a further contraction in activity. In our recent UK Sector Tracker – which looks at the UK PMIs at a more granular level – we showed that 5 out of 7 pure-play manufacturing sectors indicated falls in activity in June, pointing to a broadening out in the slowdown. Notably, the closely watched Orders-to-Inventory Ratio dropped to a six-month low (see chart), indicating that manufacturers were likely to make additional cuts to production in the coming months to avoid accumulating too much additional stock and we forecast the manufacturing PMI fell to 46.0 in July from June’s 46.5 reading. For the UK services PMI, we also expect a drop in the headline balance, from 53.7 to 53.3 following signs of a recent softening in demand.

It’s a similar story for the eurozone PMIs, although unlike the UK, the composite measure is forecast to print below 50 for a second-successive month. The US PMI readings typically attract less attention than the more closely watched ISM surveys but should nonetheless provide some useful insights into US economic trends. We look for the manufacturing reading to print below 50 for an 8th time in 9 months, while the services print is expected to drop from 54.4 to 54.0, consistent with further deceleration in the pace of services activity growth.

MARKETS

The US dollar has edged lower overnight but continues to hold on to gains made last week. These moves saw GBP/USD move below 1.30 level, while EUR/USD has edged below 1.1150.