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Take Five - World markets themes for the week ahead

Published 17/08/2018, 16:40
Updated 17/08/2018, 16:40
© Reuters. FILE PHOTO: A yuan banknote is displayed next to a U.S. dollar banknote for the photographer at a money changer inside the Taoyuan International Airport, Taiwan

LONDON (Reuters) - Following are five big themes likely to dominate thinking of investors and traders in the coming week and the Reuters stories related to them:

1/SE7EN

The Chinese yuan is under pressure, and close to falling below 7.00 per dollar for the first time in over a decade. It got some respite this week as talks planned for later this month between lower-level officials from Beijing and Washington offered a glimmer of hope that the two superpowers may work towards a solution to their escalating trade conflict. Chinese policymakers are not taking any chances, though, banning some offshore lending to discourage short-selling and support the yuan.

The currency has lost around 10 pct since March, with trade tensions adding to worries about a slowing economy. Fixed asset investment, industrial output and retail sales data in the past week were all on the soft side.

A light schedule of data releases this week should take some pressure off the yuan. But global aversion towards emerging markets might still push it towards the 7.00/$ level that many see as a line in the sand Beijing authorities will defend to prevent further currency weakness and capital outflows.

(GRAPHIC: China's slowing growth - https://reut.rs/2vQy20q)

2/YEAH, I'M GOING TO JACKSON HOLE

It's that time of year again. Jackson Hole time. Fed Chairman Jerome Powell is scheduled to speak on Friday, Aug. 24, at the annual global central bank conference in Jackson Hole, Wyoming. He will speak on monetary policy in a changing economy at the start of the two-day conference. In the past, Fed chairs have used speeches at the Kansas Fed-sponsored conference to signal future U.S. central bank policy moves.

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The Fed has signalled to markets it will hike interest rates in September and possibly December. Against this backdrop, the U.S. central bank is shrinking its balance sheet by allowing maturing securities to roll off its balance sheet without replacing them.

Some analysts and investors say the Fed could mention the balance sheet in its latest minutes, to be released Aug. 22, and that could also be a major focus at Jackson Hole. And what about the waves of Turkey-fuelled risk aversion crashing around global markets? Will Powell nod to that or the damage higher U.S. rates and a rising dollar are doing to emerging markets?

(GRAPHIC: U.S. rates & yields - https://reut.rs/2PiKb6z)

3/BEWARE THE EM BEARS

The grizzly conditions in emerging markets will remain front and centre. Emerging stocks have just entered bear marketLIRA territory, the Turkish lira and Argentine peso are locked in turmoil, the yuan and Chinese tech stocks are wobbling and the three R's - the South African rand, Russian rouble and Indian rupee - are all flashing a deep shade of crimson.

There are a number of events watch out for next week. Chinese and U.S. officials meet in Washington, just before new U.S. tariffs on $16 billion (£12.6 billion) of Chinese goods are due to take effect.

Turkey's markets are closed for most of the week for eid al adha, which could make things volatile because the U.S. Treasury has warned Ankara to expect more economic sanctions unless it hands over detained American pastor Andrew Brunson. A Turkish court on Friday rejected an appeal for his release.

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There could also be progress in the long-running NAFTA saga that has been hanging over Mexico. U.S. Trade Representative Robert Lighthizer expressed hope on Thursday that a breakthrough could be made in the coming days, though his Mexican counterpart Ildefonso Guajardo cautioned flexibility will be needed.

(GRAPHIC: Emerging market FX - https://reut.rs/2L0XBk4)

4/KING DOLLAR

The dollar's status as the go-to currency in times of market turbulence has been reinforced by the Turkish crisis and fallout. It's risen to its strongest level in over a year, but few analysts are prepared to call the peak just yet.

It's up a blistering 8 pct since mid-April, and few currencies have been left unscathed: countries with big current account deficits have taken a beating, the offshore yuan had slid to a 19-month low, while the euro, sterling and Australian dollar are all at their weakest in more than a year.

The Fed's interest rate hikes and buoyant U.S. economy have boosted the greenback, at the same time inflicting increasing damage on emerging markets. As the Bank for International Settlements said last month: "When the dollar is weak, there tends to be greater appetite for risk, but a stronger dollar often goes hand in hand with the reversal of risk attitudes."

U.S. President Donald Trump took to Twitter this week to proclaim that money "is pouring into our cherished DOLLAR like rarely before." There may be more upside ahead.

(GRAPHIC: Dollar on a roll - https://reut.rs/2L0H4gc)

5/REMEMBER 'EUROBOOM'?

The days of #Euroboom seem far behind us, with trade wars, a weakened Angela Merkel and crisis in Italian politics bringing the euro zone pessimists out of the woodwork in recent months. What's more, growth appears to have peaked.

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On the other hand, the euro's slide to $1.13, its weakest in over a year, will be welcomed in the corridors of power in euro zone capitals and ECB Towers in Frankfurt. Purchasing managers index data, the most up-to-date snapshot of activity, should tell us whether growth is picking up or not.

ECB watchers will be paying close attention. Signs of resilience in the euro zone economy will allow the ECB to go ahead with its gradual withdrawal of stimulus. Signs of weakness, especially against a backdrop of severe emerging market volatility, might make them think twice. Mario Draghi may share his thoughts on this and more at Jackson Hole.

(GRAPHIC: Euro zone GDP growth - https://reut.rs/2OIY7W6)

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