The trade week ahead – Developed, emerging and the markets

Three main trading themes for the start of September: the shift in developed markets to a more subdued outlook, volatility for emerging markets mainly in currencies and geo-politics creating trading spikes in both positive and negative measures.

The developed world is beginning to show signs of slowing forward activity, Europe to Australia to parts of North America are seeing PMIs easing, credit slowing and the ocean of cash pumped into markets from central bank in the post-GFC world is grinding to a halt. Adding further pressure is the fact global interest rates, particularly money market rates have climbed and are now heaping pressure on corporate banks. This point makes Tuesday’s RBA meeting actually interesting and a AUD mover. Will Westpac’s decision to raise its standard variable home loan rate by 14 basis point last Thursday create angst for the RBA board? It should; out of cycle rate rises of this measure will hit the RBA’s growth and inflation outlook as it will crimp growth, consumption and more importantly actual inflation. The AUD certainly was of this view falling over 50 pips on Westpac releasing its statement on rate changes. Why? It leaves the RBA in a quandary; will it have to counter the out-of-cycle rate rises with a cut to the official cash rate? Not expecting this come Tuesday however, do believe the Board will acknowledge the rate movements in the statement which the AUD is likely to take as dovish sentiment.

Emerging markets are facing a very large dilemma any country with a balance of payments issue, a high level of exposure to USD denoted debt or capital outflow concerns as developed nations repatriate the carry trade is in for a volatile period in their respective currencies. Late last week saw the TRY experiencing its highest level of volatility since its collapse on August 13, the flow through effects are well known and similar volatility trading issues were seen in ZAR, IND, INR and MYR. Even more astounding are the measures Argentina’s Central Bank is having to take to ‘safe guard’ the peso, it increased its official interest rate to 60% – highest in the world. The start of a pinch in EM is coming as the ever changing macro environment looks like being a flash point in the coming cycle.

Finally, the US-China trade war is ramping up, this coming Thursday is the closing date for written submissions by the US Trade Representative. Now according to a recent Bloomberg article “[the President] wants to move ahead with a plan to impose tariffs on $200 billion in Chinese imports as soon as a public-comment period concludes”. Ergo, come Friday will the Trump administration announce it is ready to enact a new round of tariffs on China? It would be perfect timing ahead of the November Mid-Terms as its likely to be enacted by no later than October 31st. This chart from Westpac has a perfect time line and suggest it could be even earlier.

Finally some markets admin: this week sees 30 individual firms trading ex-dividend meaning those trading the ASX will see trade disruptions that will be smoothed out by cash returns. Thursday will see the biggest points being deducted with nine firms turning ex-div including BHP which reported its largest half year dividend on record at its full year earnings release.

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