Intraday Market Thoughts

Market Relief on Debt Ceiling Deal

by Kyle Morrison
Aug 1, 2011 8:23

Market relief on debt ceiling agreement, Europe PMIs set to remain weak as growth fears weigh, UK Manufacturing PMI set to slip amidst UK growth concerns, US ISM. Ashraf will be on CNBC-Europe today at 5:20 EST (9:20 GMT).

Friday's disappointing US GDP and Chicago PMI data have raised fears of a global soft patch on the back of the recent uncertain global fiscal backdrop. The debt ceiling agreement announced overnight has been greeted with some relief by equity markets in Asia, and will no doubt carry a positive read across when markets open in Europe this morning.

Under the proposed agreement a $1trn increase in the debt-ceiling would be coupled with an immediate $1trn cut in discretionary spending. A further increase beyond 2012 would be decided by a bipartisan committee to propose another $1.5trn of cuts, tax changes and increases, which would need to happen by November.

If this committee fails to come to an agreement on the second part, automatic cuts would be triggered to programs that both Republicans and Democrats have insisted were red line issues. Investors are still expected to remain nervous until any agreement is signed off by both houses, and then signed off by the President.

Despite this deal the outlook for the coming months growth wise still appears to be deteriorating.

Fears about China's growth story appear to be throwing out mixed messages about China's economy after the latest manufacturing PMI data for July. The HSBC manufacturing measure of PMI moved into contraction territory at 49.3, however the official PMI figure increased in July from 50.2 to 50.7.

This morning's manufacturing PMI data for July for Europe and Germany is likely to continue the weaker theme with German manufacturing PMI set to remain unchanged from the last reading at 52.1 and Euro zone PMI set to just about remain in expansionary territory at 50.2. This weaker PMI, especially in the Euro zone looks likely to increase concerns about the weaker European economies like Spain and Italy.

Concerns are growing about Spain's borrowing costs on the back of Fridays events with respect to Moody's putting the country on notice of a downgrade, while political uncertainty is about to be added to the mix after PM Zapatero announced the dissolution of parliament for September for a general election in November.

If he loses the election there is no guarantee that any new government will carry out any new austerity measures that need to be implemented in order for the country to avoid being dragged into the mire of needing a bailout. With 10 year yields above 6%, and heading towards the danger level of 7%, any further uncertainty is the last thing the country needs at this moment.

Ashraf offered six new trades late on Friday, including renewing his longstanding bearish case for USDJPY & the overlay charts. Subscribers can see them here:


In the UK, after last weeks growth figures elicited a sigh of relief from analysts everywhere, expectations are for manufacturing PMI to get the third quarter off to a good start with expectations of July PMI to come in at 51, slightly down on Junes 51.3. Any number sub 51 will increase fears that the UK economy could well miss its growth targets for 2011 by some way and shift further pressure on the Chancellor for a plan B.

In the US ISM Manufacturing will also be eyed for evidence of any recovery for Q3 in light of Fridays disappointing GDP number.


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