INSUBCONTINENT EXCLUSIVE:
LONDON: Following are five big themes likely to dominate thinking of investors and traders in the coming week and the Reuters stories
Testing the taper tantrumFive years ago, the so-called Taper Tantrum sent investors fleeing emerging markets
Since then, the sector seems to have built resilience to the kind of rolling selloffs that racked them in past decades, when a crisis in one
country fuelled domino-effect selling across the developing world
Now, the rout in Turkey's lira is testing that resilience.
The lira has suffered its biggest weekly loss since Turkey's own 2001
financial and banking crisis; without major action from authorities, it may tank further
Then, there is Russia's rouble which is at fresh two-year lows after more US sanctions were imposed
And the rest of the emerging market complex appears finally to be cracking
In reality, Turkey's woes should not directly affect the economy of, say, Mexico
But fund managers hit by losses on Turkish holdings will be looking to recoup the money by selling other emerging assets in their portfolios
The second channel is the dollar which may soar if investors sell assets denominated in the rouble or the peso
So unless the lira bleeding is staunched, torrid times may be ahead for emerging markets.
- Turkey's Albayrak rolls out new economic plan,
but lira slide continues
- Turkey tumble roils emerging market currencies
2
Breaking up is hard to doSome divorces are amicable, others not so much
Britain's long, drawn-out split from the EU, whatever the protagonists say publicly, is getting messier
That's how currency traders are playing it now, slamming the pound to its lowest in over a year against the dollar (below $1.28) and
almost a year against the euro (now above 90p).
Futures market positioning and options pricing show bets on further weakness as the
probability of a no-deal, or hard Brexit rises
But is sterling on a one-way road south, or is the doom and gloom overdone The Bank of England struck an upbeat tone when it raised rates
this month, Q2 GDP growth was a reasonable 0.4 per cent, and outgoing BoE hawk Ian McCafferty reckons wage growth may hit 4 per cent next
Plus, hard Brexit is in neither side's interest, so some sort of deal will be struck
Maybe so, but the FX market's outlook right now is definitely glass half empty
On next week's horizon, traders will be able to get their teeth into the latest snapshots of UK inflation, employment and wages, and
These may determine whether sterling carries on falling towards $1.25, or recovers to $1.30.
- Sterling's Brexit slide will make Bank of
England sweat: McGeever
- Brexit uncertainty is depressing UK growth - finance minister
- Pound pummelled by stronger dollar, mounting
Losing appetiteOver the past decade, Japan and China have jockeyed back and forth as the No
1 and 2 foreign holders of US Treasuries
But their appetite for US debt has slackened notably from their peaks during the Federal Reserve's quantitative easing era, however, and
Japan's holdings have been edging ever closer to dropping below the $1 trillion mark for the first time since Sept
2011.
Whether that milestone was breached in June will be revealed next week, when the United States delivers its Treasury International
Capital System (TICS) report on foreigners' holdings of government debt.
Data this week from Japan's Ministry of Finance showed Japanese
investors sold US bonds again in June, to the tune of $4.09 billion amid expectations of steady interest rate hikes from the Fed.
-
Foreigners buy US Treasuries in May; Russia drops out of list-data
- Japanese investors sold US and German bonds in June, bought French
Zero hourClose on the heels of this week's foreign exchange reserves data from China, come next week's numbers on whether state banks
purchased dollars in July - as they did in June and May.
That data is important because markets are trying to figure out why Chinese
reserves rose last month, despite a trade war and a yuan fall to 14-month lows
State banks have carried on buying dollars, suggesting the economy isn't seeing the sort of capital flight that accompanied currency
weakness bouts in 2016 and early-2017.
But the yuan is a whisker away from 7-per-dollar, the level China defended in 2015-2016 by selling a
So can markets expect a hard stop as the 7-mark approaches Will that mean state-run banks will sell the dollars borrowed via swaps Or is the
line in the sand determined by the trade-weighted yuan basket That is pretty close to the 92-mark, the level economists deem sufficiently
weak to support growth and exports.
- China July FX reserves rise to $3.118 trln despite trade tensions -
- Chinese yuan to regain some
ground if trade tensions ease -
5
Stock tradeResults-day stock moves have been unusually sharp both in Europe and the United States this season, a telltale sign of investor
anxiety in an ageing bull market despite buoyant earnings.
European stocks had their biggest swings in 15 years after results, Goldman Sachs
analysts found, while US stocks moved an average of 3.9 per cent.
Why the rise in volatility Earnings, on the face of it, have been very
strong.
Year-on-year earnings growth for the SP 500 this quarter stands at 25 per cent, more than double the still-strong 12 per cent
managed by MSCI Europe companies
Analysts are rapidly revising up global earnings estimates.
But sales figures are beginning to show pressure on companies' margins from
tariffs, fuelling fear that rising protectionism could bring a late-cycle market to its knees.
Companies have downplayed the impact of trade
war, but vulnerable sectors - such as European luxury, capital goods and carmakers - have been especially volatile.
- Trade war threatens
reign of luxury stocks
- At bargain prices, European banks attract value-hungry investors
- Watch out for trade war margin pressure
