Last week stocks remained broadly flat with light trading as US 10-year Treasury yields rose 4bps (from 2.84% to 2.88%) and the dollar ended the week overall slightly weaker undoing its strength earlier in the week. Also earlier this week Fed Chair Jay Powell left markets guessing with just a couple of words of ad-libbing during his testimony to Congress, stating, “With a strong job market, inflation close to our objective, and the risks to the outlook roughly balanced, the FOMC believes that (for now) the best way forward is to keep gradually raising the federal funds rate.” This left many suspecting that the Fed want markets to know they are watching the flattening of the yield curve yet aren’t perturbed from “gradually raising the federal funds rate” even if it inverts the US Treasuries active curve.
News was dominated by Trump’s meeting with Putin in Helsinki: mostly consisting of a few disturbing outbursts and troubling opaqueness – with nobody other than the two leaders themselves knowing all that was actually discussed. Meanwhile Xi Jinping made a state visit to the UAE as part of a UAE-China Week focusing on bilateral relations and enhancing the trading and cultural relationship between the countries. Elsewhere in emerging markets Fitch cut Turkey’s rating further into junk territory dropping it one notch from BB+ to just BB as inflation approaches 16% and markets prepare for another rate hike later this week.
Regarding global trade, the US continues to move backward, the EU move forward and the UK move nowhere. The US stayed its protectionist course but moved to sue a number of WTO countries for their retaliations to Trump’s recent aluminium and steel tariffs. The International Monetary Fund (IMF) warned that the sustained and escalating global trade conflicts initiated by the Trump Administration threaten to derail the economic recovery and depress medium-term growth prospects. The IMF believes that the global economy as a whole could lose about 0.5% of growth or about USD 430bn in lost GDP by 2020, with the possibility of the US being hit especially hard. Closer to home, the UK’s Parliament continues its infighting over Brexit: this week narrowly rejecting an amendment supporting remaining within the EU’s Custom Union. Meanwhile the EU had a more successful week closing the largest bilateral trade deal with Japan, The Economic Partnership Agreement, following half a decade of negotiations.
The week ahead includes a continuation of quarterly earnings reports; these are expected to be somewhat mediocre following Q1 earnings that were stronger due to a number of temporary tailwinds. This week’s central bank highlight will be Thursday’s speech from ECB President Mario Draghi with anticipation of a little more insight into their view on interest rates (following June’s decision to taper bond purchases from September) and on deepening trade disruptions. Friday will see the release of US GDP figures for Q2 with high expectations of annualised growth of 4.3% for the quarter.