Eurozone Economy Stalls as Prorogation Ruling Looms

The euro weakens as the economy shows no signs of recovery, while sterling traders await the Supreme Court’s ruling ahead of a busy data calendar.

Previous Day's Market Highlights

Concerns over the eurozone economy came to the fore once again on Monday, as a fresh trading week began with a dismal set of PMI surveys. 'Flash' survey data for September showed activity falling to multi-month lows in both the manufacturing and services sectors, providing the first signs that a slowdown in the production industry may be spilling over into the broader economy. The manufacturing PMI printed 45.6, an 83-month low and almost 2 index points lower than in August, indicating a steep decline in activity. A significant proportion of this decline stemmed from Germany, where the manufacturing PMI fell to a more than 10-year low of 41.4. Things were almost as gloomy in the services sector, where the PMI read 52.0 - well below expectations, and the lowest level recorded since January. These surveys point to the eurozone economy being close to stagnation, with momentum waning as the third quarter draws to a close; providing further evidence that the ECB's sweeping stimulus package requires assistance from looser fiscal policy to turnaround the bloc's economic fortunes. For markets, the immediate reaction to the disappointing release was a weaker euro. The common currency shed over 0.5% in response to the data, though pared losses to end the day just 0.2% lower against the dollar.

Meanwhile, sterling continued to decline as last week's Brexit optimism continued to turn into pessimism. Hopes of the two sides inching closer to a renegotiated deal continue to be dampened by senior figures from both the UK and EU, thus denting the attractiveness of the pound and slightly raising the chances of a no-deal Brexit. Monday saw PM Johnson state that he is not pinning his hopes on getting a breakthrough in talks on the sidelines of this week's UN General Assembly, while EU Chief Negotiator Barnier repeated that, at present, the UK's proposals for replacing the Irish backstop are unacceptable. EU Council President Tusk and Irish Taoiseach Varadkar echoed these remarks. With uncertainty building again, the pound settled 0.3% lower against the dollar, and 0.1% lower against the euro.

Elsewhere, the data calendar was light, resulting in relatively muted volatility. The US dollar ended the day around 0.1% higher against a basket of peers, though this gain was largely due to a weaker euro. The New Zealand dollar was Monday's major mover, adding around 0.6%. The move was largely driven by technical factors, with the kiwi dollar bouncing off a 4-year low that was hit on Friday. The Aussie dollar also gained ground, closing around 0.3% higher.

In other markets, equities on both sides of the Atlantic were dragged down by the poor eurozone data. In Europe, the pan-continental Stoxx 600 closed 0.8% lower, while the US benchmark S&P 500 closed unchanged. Finally, oil prices continued to firm as Saudi supply concerns lingered. Global benchmark Brent settled 0.76% higher, while US WTI crude gained 0.95%.

Currency Pairing 08:00 Today Vs 08:00 Yesterday Four-Week High Four-Week Low % Change
GBP/EUR 1.1310 1.1381 1.0930 3.96%
GBP/USD 1.2430 1.2583 1.1958 4.97%
EUR/USD 1.0990 1.1110 1.0926 1.66%
GBP/AUD 1.8325 1.8496 1.7792 3.81%
GBP/NZD 1.9720 2.0003 1.8996 5.03%
GBP/CAD 1.6475 1.6691 1.5956 4.40%

Today's Market Highlights

Brexit will remain at the forefront of investors' minds today, with the Supreme Court set to announce their ruling on the legality of the government's decision to prorogue, or suspend, Parliament this morning. If the ruling goes in the government's favour, things remain as they are, with Parliament still suspended until 14th October. However, if the Court rules against the government, things will get a little (or perhaps a lot) more complicated. In this instance, the next steps depend largely on the precise wording of the judgement. If the 11 Supreme Court Justices rule that this prorogation is unlawful, the ruling may leave open the possibility of a second prorogation, this time in a lawful manner. Alternatively, the Justices may instruct the government to recall Parliament before 14th October, or declare that, due to the prorogation being unlawful, Parliament remains in session and resumes sitting as if no suspension had occurred. The impact of all this on the pound is almost as difficult to decipher as the process itself, however the potential recall of MPs may be seen as a positive for sterling. This would be due to both increased scrutiny of the government, in addition to possible further Parliamentary manoeuvring to pull away from a no-deal Brexit.

On the data front, the calendar is relatively busy. The morning session will likely be dominated by September's IFO surveys from Germany, expected to show sentiment remaining at relatively pessimistic levels. The closely watched business climate indicator, a useful leading indicator of economic performance, is expected to hover close to 7-year lows at 94.5. A sub-forecast release, combined with yesterday's disappointing PMI surveys, would be symbolic of further economic softness, likely resulting in a weaker euro. 

The US economic calendar is also busy, with this afternoon's consumer confidence figures the highlight. The confidence index is expected to remain at a healthy level of 133.0 in September, a sign that economic growth should be underpinned by solid consumer spending in the coming quarters. Any deterioration in confidence will be closely watched by market participants, and Federal Reserve policymakers, with a drop in confidence potentially being symbolic of a broader economic slowdown. Today's other, lower-tier, releases include housing price index data for July, and September's manufacturing activity data from the Richmond Fed.

Finally, the central bank speaking calendar is also well-populated. Investors will pay close attention to remarks from RBA Governor Lowe for any signs of an imminent rate cut, in addition to comments from ECB Vice President de Guindos, likely to see a reiteration of the push for fiscal stimulus from eurozone governments.

Today's Economic Calendar

Time Currency Release Consensus Previous
9:00am EUR Germany IFO Business Climate (Sep) 94.5 94.3
9:30am GBP Public Sector Net Borrowing (Aug) 6.65bln -1.97bln
10:30am GBP Supreme Court to Announce Decision on Prorogation of Parliament
3:00pm USD CB Consumer Confidence (Sep) 133.0 135.1
11:45pm NZD Trade Balance (YoY - Aug) -4.86bln -5.46bln