Global financial markets have been very volatile from the end of July/ start of August. This has been driven by the Federal Reserve cutting rates at the end of July but signalling a less dovish tone than the market had expected, whilst President Trump started August by stating that the US would levy a further 10% of tariffs from 1st September on $300bn of Chinese goods.
Last week started with a tit-for-tat retaliation from China, primarily in the guise of a weakening of their currency, with USDCNY (US Dollar to Chinese Yuan or Renminbi) breaking through a much watched 7.00 level, to a 2008 low for the Chinese currency.
This activity saw a further plunge in global equity markets to start last week, with major averages already lower after the less dovish Fed and the Trump tariff threat. However, after the USDCNY stabilised from Tuesday and with no fresh trade threats, equity markets rebounded for much of last week, attempting to form technical bases.
In this “risk off” scenario, Government Bond markets have headed higher in a flight to quality bid, which has seen record low yields for German Bonds, whilst US Treasuries have moved to multi-year lows.
In the Forex space, the Japanese Yen has also seen strength as a safe haven (alongside Gold), whilst the Euro has also strengthened against the US Dollar in a flight to quality as a reserve currency. Generally, however, the US Dollar has rallied against most major currencies.
The next significant development last week was the more aggressive than expected 50bp rate cut from the Reserve Bank of New Zealand (RBNZ) on Tuesday. This was in reaction to a slowing domestic economy and global economic slowdown concerns. This initially sent the New Zealand Dollar plunging lower, but the NZDUSD has seen a subsequent rebound. Initially, this rate cut also pulled the Australian and Canadian Dollars lower too.
The final major macroeconomic event of last week was on Friday with the release of UK Gross Domestic Product (GDP). This came in far worse than expected with the Quarter on Quarter number expected to be flat, at 0.0%, but posted at -0.2%. This was the firstly quarterly contraction since 2012 and doubtless reflects growing concerns regarding a “No Deal” Brexit. The main markets impact was to see the Pound plunge lower versus the US Dollar and the Euro, with the GBPUSD Forex rate hitting a two-year low whilst EURGBP hit a five-year high.
What to Watch
As always, critical for this week will be to watch for comments from US and Chinese authorities regarding the US and China trade negotiations, AND from Federal Reserve members regarding the possible effect on the US economy from these trade pressures.
The key macroeconomic data points in focus for this week are; German, US, UK Consumer Price Index (CPI); UK Employment report; German and EC Gross Domestic Product (GDP); Australian Employment report, US Retail Sales and Michigan Consumer Sentiment Survey.
Earnings season continues to slowdown and come towards an end but with Cisco and Walmart the highlights from the US on Wednesday and Thursday respectively.
- Monday: Nothing of note
- Tuesday: German Consumer Price Index (CPI) and ZEW Survey, UK Employment report, US Consumer Price Index (CPI)
- Wednesday: China Retails Sales and Industrial Production, German Gross Domestic Product (GDP), UK Consumer Price Index (CPI), EU Gross Domestic Product (GDP) and Employment report
- Thursday: Australian Employment report, UK Retail Sales, US Retail Sales, Industrial Production and Capacity Utilization
- Friday: US Michigan Consumer Sentiment Survey
- Wednesday: Cisco (US)
- Thursday: Walmart (US)