Developed stock markets ended the second half of the week with negative momentum, but given gains earlier in the week still finished 0.5-1% higher for the week. Flows into emerging markets continued to hold up.
Last week brought more evidence that global activity and trade volumes have slowed, but markets were resilient. The key moves were in the bond market, where 10y bunds rose by 8bp and where the front of the US Treasury curve backed up by almost 10bp on declining risk aversion and higher inflation expectations, partly driven by higher oil prices.
The slowdown reflected in global activity indicators is most clear in Europe, where recent weaker readings on European industrial production and soft manufacturing and services PMIs led us to lower our forecast for euro area growth in Q1 18 to 1.6% q/q saar (from 2.1% previously).
Focus today on Euro zone PMIs, which will be watched closely following the slowing in growth momentum over recent releases.
EURUSD came under pressure into the end of last week in line with the broader bid tone for USD as we broke through support 1.2300 down to 1.2250. The ECB meeting on Thursday is likely to be a non event, with no material changes in forward guidance expected. The market will be watching for any commentary regarding the recent slowing in data.
Sterling remains under pressure at the start of this week, following a volatile week last week on the back of Carney’s dovish comments. Reports on Friday that European Union officials are set to reject a potential UK solution to the crucial issue of what happens to the Irish border after Brexit (Bloomberg) is further weighing on the currency.