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Steve Miley’s What to Watch This Week – 2nd September

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Updated: 27 August 2020

The trade war between the US and China continues to be the major focus for global market participants, as evident since early August. This focus, however, has slightly shifted over the past week into month-end. The absence of any heightening of trade tensions between the two parties has allowed for global asset classes to consolidate, and although stock markets undoubtedly remain nervous, equity market recoveries in Asia, Europe and the US over the past week have eased the more aggressive “risk off” theme had had been witnessed earlier in August. However, with new tariffs kicking in this past weekend, the resumption of trade talks will be very much in focus.

The spotlight has been slightly shifted away from the trade war and back onto Brexit in the past week, with the Johnson Government in the U.K. announcing on Wednesday the proroguing of Parliament. In basic terms this means that the current parliamentary session has been ended prematurely, but the timing means that Members of Parliament will have only limited time to debate (and potentially try to stop) the U.K. crashing out of the E.U. on a “no deal” basis on 31st October. This has caused a huge backlash, with political commentators and Members of Parliament plus with the general public, with significant demonstrations across the U.K. at the weekend. This week’s return of Parliament before the current session is brought to an end will likely see challenges to the government’s “no deal” stance and will potentially have impacts on UK financial assets and possibly global markets too. Furthermore, markets will watch for possible developments in the Brexit negotiations between the U.K. and E.U.

The past week and weekend have seen heightening tensions in Hong Kong as the pro-democracy demonstrations continue. Although thus far only having fleeting impacts on global financial markets, this situation has to be monitored for potential escalations.

Global government bond markets stay very strong, as investors have moved into safe haven assets in August, in reaction to trade war tensions and global equity markets weakness. The end of August saw German government bonds pushing to record low yields (negative), whilst US government bonds are close to multi-year low yield. Furthermore, the US yield curve in both the much-watched 2-10yr and 3 month-10yr sectors has further inverted into latter August. This global bond market activity needs to be monitored, as prior lower yield and inversion moves in August were a catalyst for equity market losses and also impacted across asset classes, including commodities and Foreign Exchange.

Key to Watch

Four main geopolitical influences to continue to monitor this week:

  1. Still extremely dominant for price activity across global financial markets asset classes will be the ongoing trade war/ negotiations between the US and China, so any updates or developments will be critical.
  2. The return of the U.K. Parliament from their Summer recess and any developments with respect to the proroguing of Parliament and/ or the attempts to block a “no deal” Brexit.
  3. Developments between the E.U. and the U.K. regarding Brexit negotiations.
  4. The tensions surrounding pro-democracy demonstrations in Hong Kong.

Furthermore, on more of a technical bassi for markets,  the level of global bond yields and the inverting of the US yield curve could also potentially impact wider asset classes.

The coming week brings a slew of significant economic data, Federal Reserve Committee speakers and two notable Central Bank decisions, from Australian and Canada.

Key data and macroeconomic events to monitor for the coming week as below.

Macroeconomic focus

  • Monday: US Labor Day Holiday markets closed; Asian, European and UK Manufacturing Purchasing Managers Index (Markit)
  • Tuesday: Reserve Bank of Australia Meeting and rate decision; US Manufacturing Purchasing Managers Index (Markit and ISM), Fed’s Rosengren speaks
  • Wednesday: Global Service and Composite Purchasing Managers Index (Markit), EU Retail Sales, Bank of Canada Meeting and rate decision, numerous Fed speakers
  • Thursday: German Factory Orders, US ADP Employment change, US Services Purchasing Managers Index (Markit and ISM)
  • Friday:             German Industrial Production, US Employment report, Canadian Employment report, Fed’s Powell speaks