The Weekly Update

Equity markets remained depressed last week but muted in comparison to the sharp sell-off from the prior week. The S&P 500 fell half a percent on the week as US 10-year Treasury yields fell a further 10 basis points, closing the week at just 1.75% with similar Bund yields falling a further 8 basis points to -0.58%; meanwhile, the Japanese yen strengthened a further point to 105.7 versus the dollar. Numerous growing trade tensions and political upsets helped feed ongoing risk-off sentiments. However, markets gained some composure towards the end of the week, paring losses and preventing a repeat of the previous week.

Following on from Trump's new tariffs announced over the first weekend of August, the U.S. Treasury Department went on further to finally designate China as a “currency manipulator” (as Brad Setser of the CFR quipped, “roughly 12-13 years after it should have first named China, and roughly 5 years after China stopped manipulating”). The move comes after China’s Central Bank allowed its currency to weaken, falling to as low as 7.14 against the dollar overnight, amid the ongoing trade dispute that has rocked global markets. China responded with accusations that the US were “deliberately destroying international order”, with the tit-for-tat reverberating through the week.

Correspondingly, disputes escalated between Japan and South Korea with the former removing the latter from its “white-list” of countries with fast-track export status, and South Korea responding with plans to invest 6.5 billion dollars in research and development, in a move that will cut the country’s reliance on Japanese imports. Signs of increasing protectionism across markets under different auspices, and not just from the US, may prove to be a key trend affecting near-term growth and market conditions. Next up to disrupt global markets was Italy, where Matteo Salvini withdrew his support from the governing coalition, at the same time calling for a snap election. The move comes after months of fighting between the anti-establishment Five Star Movement and Salvini’s League Party.

Turning to the week ahead, the economic calendar starts off relatively quiet on Monday. Tuesday’s data releases include US CPI, Japan PPI, UK unemployment rate, Germany CPI and ZEW economic sentiment. On Wednesday UK publishes its inflation indicators, China industrial production and retail sales, Eurozone (and Germany) GDP and industrial production, Australia consumer confidence and US import and export prices. Following on Thursday is the Australia unemployment rate, China house prices, Japan and US industrial production along with US and UK retail sales. Lastly, on Friday we have China FDI figures, Eurozone trade balance and the US Michigan consumer sentiment.

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