Trade and Jackson Hole Talks Top the Agenda

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With “risk-on and off” trading strategies dominating proceedings this summer, expect this to be another action packed week despite the lack of economic data releases.

A stronger U.S. dollar and higher interest rates are pushing EM economies into ‘bear’ territory and their respective currency pairs have seen extreme volatility even in presence of the own central banks – TRY, RUB, IDR, INR.

Lower-level officials from China will meet in Washington (Aug 21/22) and try and work towards a solution to their escalating trade conflict between the worlds two largest economies.

In Europe, investors are beginning to set their sights on Italy, as politics and budget concerns have EUR ‘bulls’ worried.

Due to the EM meltdown and weaker domestic fundamentals, the Chinese Yuan is threatening to trade through the psychological key ¥7 handle for the first time in a decade. Expect the People’s Bank of China (PBoC) to defend any further Yuan weakness, especially through the trade talks.

Fed Chair Powell is scheduled to speak on Friday (Aug. 24), at the annual global central bank conference in Jackson Hole. He will speak on “monetary policy in a changing economy.”

On tap: There are no central bank meetings this week, but there will be a lot of central bank speeches and copy. AUD monetary policy minutes (Aug 20), NZD retail sales (Aug 21), CAD retail sales & FOMC meeting minutes (Aug 22), ECB monetary policy meeting minutes (Aug 23) and U.S. core-durable goods orders (Aug 24).
 

1. Global stocks find support

Contagion worries continue to have an impact on investor risk sentiment, especially in emerging markets.

Overnight, there were advances across most Asian equities, although Japanese stocks bucked the upward trend. The Nikkei fell as tech stocks weakened, while trading was thin as investors’ awaited developments from trade talks expected between the U.S. and China this week. The Nikkei share average dropped -0.3%, while the broader Topix declined -0.3% in the lowest traded volume in four-months.

Down-under, Aussie stocks edged a tad higher, as cautious outlook from retailers offset gains from materials stocks, which were supported by upcoming U.S/Sino trade talks. The S&P/ASX 200 index added +0.1% after recording a +0.2% gain on Friday. In S. Korea, the Kospi stock index (+0.4%) and the won edged higher overnight on improved investor sentiment.

In Hong Kong, stocks rebounded overnight, led by IT and resources shares, as a stabilizing yuan (¥6.8446) improved risk appetite. The Hang Seng index rose +1.4%, while the China Enterprises Index gained +1.1%.

In China, stocks recovered from a 30-month low to close higher on Monday after a report that China’s securities regulators summoned brokerage analysts for views on the market improved investor sentiment. The Shanghai Composite index ended up +1.1%, while the blue-chip CSI300 index ended +1.17% higher.

In Europe, regional bourses trade higher across the board, tracking a stronger Asian session and U.S. futures.

Indices: Stoxx600 +0.6% at 383.3, FTSE 0.6% at 7600, DAX +1.0% at 12338, CAC-40 +0.6% at 5379, IBEX-35 +0.6% at 9474, FTSE MIB +0.1% at 20438, SMI +0.3% at 9034 S&P 500 Futures +0.2%
 

2. Brent oil prices stabilize

Brent crude oil prices stabilize atop of +$72 per barrel overnight after several weeks of decline, weighed down by concerns over slowing global economic growth but supported by an expected fall in supply from Iran due to U.S. sanctions.

Brent crude futures are at +$72.11 per barrel, up +28c, while U.S. West Texas Intermediate (WTI) crude futures are up +3c at +$65.94 per barrel.

Note: Last week, Brent declined for a third consecutive week, while WTI fell for a seventh week due to concerns about a slowdown in economic growth.

Expect investors to take their cue from this weeks trade Sino/U.S. trade talks in Washington (Aug 21/22).

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Gold prices have edged a tad higher as investors found the ‘yellow’ metal attractive after prices fell to a 19-month low last week, while a stronger dollar is capping market gains ahead of planned U.S. trade talks. Spot gold is up +0.2% at +$1,186.33 an ounce, after touching its lowest since January 2017 at +$1,159.96 on Thursday. U.S. gold futures are up +0.7% at +$1,191.60 an ounce.
 

3. Turkish bonds to face pressure after downgrades

Turkish government bonds have come under renewed pressure after Friday’s downgrades by Moody’s Investors Service and S&P Global Ratings.

Moody’s cut its rating on Turkey to ‘Ba2’ from ‘Ba3’ and changed the outlook to negative, citing the continuing weakening of Turkey’s public institutions and the related lower predictability of Turkish policy making.

S&P cut Turkey to ‘B+’ from ‘BB-‘ with stable outlook, pointing to the substantial weakening of the lira ($6.1168) with its negative fiscal implications and strain of corporate balance sheets.

Note: Due to a religious holiday, markets are closed in Turkey this week, which will reduce liquidity and could amplify TRY volatility.

Elsewhere, the yield on 10-year Treasuries has decreased less than -1 bps to +2.86%, the lowest in more than a month. In Germany, the 10-year Bund yield has gained +1 bps point to +0.31%, while in the U.K, the 10-year Gilt yield increased less than +1 bps to +1.236%.
 

4. Dollar remains in vogue

The currency crisis in Turkey and trade talks between the U.S./China this week will dictate currency price moves.

Overnight, EUR/USD (€1.1406) is a tad softer by -0.3% and holding above the psychological €1.14 handle. The Italian budget remains in focus with reports that Italy would launch a +€50B infrastructure plan next month. If so, this would blow out E.U. budget-deficit rules. The €1.15 area remains the key resistance.

USD/TRY ($6.1168) is higher by over +1% after last week’s sovereign downgrades by Moody’s and S&P Global Ratings on Turkey. Analysts consensus sees TRY weakening towards $8.00 area before reaching the pain threshold that would likely compel President Erdogan to compromise on some of his strategic objectives.

The pending resumption of U.S./China trade talks has prompted the market to speculate whether the U.S. could pressure China to take measures to keep the Yuan from falling further. The Chinese Yuan remains under pressure and is threatening to trade through the psychological key ¥7 handle for the first time in a decade. The Yuan has lost around -10% in the last five months, with trade tensions adding to worries about a slowing economy – Chinese fixed asset investment, industrial output and retail sales data last week were all on the soft side.

Note: China did set its Yuan reference rate a tad stronger in the Asian session today (¥6.8718 vs. ¥6.8894 prior).
 

5. U.K. house prices drop -2.3% in August

U.K. data Sunday showed that domestic house prices dropped -2.3% in August from July, as new sellers launched a “late summer sale” to try and find a buyer more quickly, according to figures released by Rightmove.

The decline was steeper than the -2.1% drop seen in August last year, with the more subdued London market and the South East weighing on the national average.

On an annual basis, meanwhile, prices were up +1.1%, but this was down from a +1.4% increase in July.

Digging deeper, in London, the price of property coming to market was down -3.1% on the month in August, resulting in an annual rate of decrease of -1.2%. In the South East, prices were down -2.3% on the month and up +0.6% on the year. Ex- those two regions, the rest of the country saw a monthly decline of -1.5%.