Macroeconomic Outlook and Recap: 12/08/19

Since the end of July global financial assets prices have seen an increase in volatility, which was initially caused by the Federal Open Market Committee (FOMC) indicating a less dovish bias than expected by market when cutting interest rates by 25bo at the end of July. Jerome Powell calling the rate cut a “mid-cycle adjustment”.

Moreover, August kicked off with US President Donald Trump Tweeting the USA would impose another ten percent of tariffs on Chinese goods to the value of $300bn starting September 1st.

Last week began with a reaction from China, allowing their currency to depreciate versus the US Dollar to a 2008 low for the Chinese currency. This saw USDCNY (US Dollar versus the Yuan/ Renminbi) to push through the psychological 7.00 barrier.

This was viewed as a retaliatory measure by global market players and encouraged another aggressive selloff for global stock markets on Monday, with the major global equity indices reinforcing selloffs seen from the less dovish Federal reserve and from the threat of further tariffs.

From Tuesday, however, the absence of any further trade war escalation and a correction back lower in USDCNY encouraged the US and major global stock averages to recover forming tentative short-term bottoms.

In other financial markets, the “risk off” environment has seen strong demand in a flight to quality for Government Bonds, with record low yields for German Bunds and US Treasuries at multi-year low yields.

In currency markets, the safe haven Japanese Yen has rallied and even the Euro has advanced versus the US currency. Gol has also rocketed higher, again in a flight to quality/ safe haven move.

Moving on to Tuesday last week and the Reserve Bank of New Zealand (RBNZ) Meeting. This saw the Central bank ease interest rates by 0.50%, a more aggressive move than forecasters and the market had expected. This rate cut was due to both the domestic and global economic slowdowns. The New Zealand Dollar saw a significant >1% selloff versus the US Dollar, through NZDUSD did rebound into the second half of the week. Furthermore, the RBNZ rate cut also saw the Canadian and Australian Dollars weaken (though again these currencies did the rebound).

Then on Friday markets saw the announcement of quarterly UK Gross Domestic Product (GDP). This posted far more negative than forecasters predictions with the Quarter on Quarter number forecast to be at 0.0% but ended up at contracting 0.2%. The first QoQ contraction since 2012 is seen as a reaction to mounting worries concerning a No Deal Brexit. This saw Sterling plunge against both the Euro and US Dollar, with EURGBP hitting a five-year high, whilst GBPUSD hit a two-year low.

What to Watch

Key as ever into this week will be to monitor for comments from Chinese and US Government authorities with respect to the ongoing negotiations on trade and for any escalation on tariffs or in the currency markets. Furth more, traders should watch for comments from members of the Federal Reserve and the impact of the trade war escalation on US economy.

Economic data
12th August Nothing major
13th August German Consumer Price Index (CPI) and ZEW Survey, UK Employment report, US Consumer Price Index (CPI)
14th August China Retails Sales and Industrial Production, German Gross Domestic Product (GDP), UK Consumer Price Index (CPI), EU Gross Domestic Product (GDP) and Employment report
15th August Australian Employment report, UK Retail Sales, US Retail Sales, Industrial Production and Capacity Utilization
16th August US Michigan Consumer Sentiment Survey
14th August Cisco (US)
15th August Walmart (US)

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