LONDON: Following are five big themes likely to dominate thinking of investors and traders in the coming week.
1/TESTING THE TAPER TANTRUM
Five 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 fueled 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 U.S. 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.
2/BREAKING UP IS HARD TO DO
Some divorces are amicable, others not so much. Britain's long, drawn-out split from the EU, whatever the protagonists say publicly, is getting messier. The risk is it gets ugly. 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 percent, and outgoing BoE hawk Ian McCafferty reckons wage growth may hit 4 percent next year. 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 retail sales. These may determine whether sterling carries on falling toward $1.25, or recovers to $1.30.
Over the past decade, Japan and China have jockeyed back and forth as the No. 1 and 2 foreign holders of U.S. Treasuries. But their appetite for U.S. 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 U.S. bonds again in June, to the tune of $4.09 billion amid expectations of steady interest rate hikes from the Fed.
Close 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 trillion dollars. 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.
Results-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 U.S. stocks moved an average of 3.9 percent.
Why the rise in volatility? Earnings, on the face of it, have been very strong.
Year-on-year earnings growth for the S&P 500 this quarter stands at 25 percent, more than double the still-strong 12 percent 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. - Reuters
Reuters also reported:
Tariffs are starting to bite big manufacturers and Wall Street could get another bout of caution and uncertainty from major industrial companies when a swath of reports comes in over the next week.
Investors are worried about the impact on earnings should the United States' trade war with China and other major trading partners escalate. Deutsche Bank in June estimated that an escalation of the dispute to include $200 billion of imports would hit earnings growth by 1-1.5 percent.
"If today's political rhetoric intensifies and translates into actual protectionist policies, it will be a negative for all businesses in the U.S. and abroad, including ours," Hamid Moghadam, chief executive of real estate investment trust Prologis, warned on a conference call on Tuesday.
Manufacturers across the country are concerned about Washington's recent trade policies, with some saying that uncertainty related to tariffs was already hitting them, according to anecdotes collected by the U.S. Federal Reserve in its Beige Book, released on Wednesday.
That is starting to show up in early reports by companies. Earnings from Honeywell International
GE said it expects tariffs on its imports from China to raise its costs by up to $400 million and Alcoa
Second-quarter corporate earnings seasons kicks into gear starting on Monday, with results on tap from companies including Corning
The United States in March said it would impose tariffs on steel and aluminum, and on July 1, Washington and Beijing applied tariffs on $34 billion worth of each other's goods. Trump has threatened additional tariffs, possibly targeting more than $500 billion worth of Chinese goods - roughly the total amount of U.S. imports from China last year.
Since March 1, S&P 500 industrials <.SPLRCI> have fallen nearly 3 percent, reflecting the sector’s dependence on international commerce. The S&P 1500 steel index <.SPCOMSTEEL> has lost 1 percent since March 1, as investors worry that a slowdown in global demand could offset U.S. steelmakers’ benefits from tariffs against their foreign competitors.
Many of the roughly 180 S&P 500 companies reporting their results next week are not directly exposed to China, but they may still have reasons for concern.
"There are companies that might not be significantly impacted by tariffs from a cost perspective, but from the uncertainty around it," said Kurt Brunner, a portfolio manager at Swarthmore Group in Philadelphia, Pennsylvania. "They could see customers holding off on spending because they don't know what is going to happen."
Qualcomm, reporting on July 25, depends on China for two thirds of its revenue. The U.S. chipmaker is also facing a drawn-out wait for Chinese regulators to approve its $44 billion takeover of NXP Semiconductors
A strong U.S. economy and deep corporate tax cuts have fueled a 5 percent increase in the S&P 500 this year, even as Wall Street worries about the tariffs' impact.
Super-charged by deep corporate tax cuts, S&P 500 earnings are expected by analysts to grow 22 percent in the June quarter and 23.1 percent in the September quarter, according to Thomson Reuters I/B/E/S. Estimates for the September quarter are likely to change as companies provide their outlooks over the next few weeks.
"The market is looking through Trump's trade negotiations and governing style because of this strength. However, we are more cautious on the trade overhang and think headline risk, both to the upside and downside, will remain high," EventShare Chief Investment Officer Ben Phillips wrote in report on Thursday. - Reuters
The likelihood of a Democratic party takeover of at least one house of the U.S. Congress in the midterm elections in November is prompting some portfolio managers to move more money to cash and rotate away from sectors like financials and technology that could see greater regulatory scrutiny.
Fund managers from Federated Investors, OppenheimerFunds, and BMO Global Asset Management are among those who are repositioning their portfolios and seeing cash as more attractive with the Nov. 6 elections less than 100 days away.
Chief among their concerns: a so-called Blue Wave of Democratic victories could end the Republican Party's single-party control of the White House and Congress, leading to both more investigations into possible abuses by the Trump administration and more stock market volatility.
"The reason for our concern very simply is that Democratic voters are very engaged and likely to come out in force, and the party in power typically does not do well in the first midterms," said Phil Orlando, chief equity market strategist at Federated Investors in New York.
Such a move would also embolden Democratic presidential candidates to run on a platform in 2020 calling for universal health care, increasing the minimum wage, and repealing the Republican-led corporate tax cuts passed in December, all of which could slow economic growth, he said.
Concerns about a resounding Democratic victory prompted Orlando to sell some of his U.S. stocks in late June, leaving his equity still overweight toward U.S. equities but down from 8 percent to 5 percent, and move those assets into cash.
Orlando expects that the U.S. stock market will tumble at least 10 percent between late August and September as the broad market starts to price in Democratic gains in Washington, he said.
Real Clear Politics, a polling aggregation site, has Democrats leading by 7 percentage points on a generic ballot, but rates the chance of a Democratic takeover of the House as a toss-up.
Democrats would need to retake 23 seats to gain a majority in the House, and 2 seats to control the Senate.
Of the 36 Senate seats being contested, only 9 are currently held by Republicans, and 10 Democratic incumbents are running for re-election in states won by President Trump.
There are few signs in financial markets, so far, that Wall Street expects the economy to stall if the Democrats were to regain control of at least one house of Congress.
The U.S. benchmark S&P stock 500 index is up 5.2 percent for the year, and has gained nearly 9 percent since its lows in early February.
The U.S. economy grew at an estimated 4.1 percent in the second quarter this year, the Commerce Department said July 27, its fastest growth rate since 2014.
Yet a victory by more progressive Democrats in the midterm elections could lead to a greater regulatory focus on financial and technology firms that have so far received a pass from the Trump administration, said Jon Adams, senior investment strategist at BMO Global Asset Management,
A victory by progressive Democrats may also lessen the likelihood of a bipartisan deal on infrastructure and strengthen calls for reversing corporate tax cuts, he said.
"The Democratic Party is struggling with the same issue that Republicans have dealt with, which is having two parties within one party," he said.
"We think the economic outlook for the next 18 months is still very strong and a lot of that is due to the fiscal stimulus" of the Republican-led tax cuts, he said.
Even if Republicans do retain one or both houses of Congress, there is little likelihood that the so-called "Trump trade" will come back in force, said Brian Levitt, senior investment strategist at OppenheimerFunds.
The "Trump trade" was a strategy that involved buying financial, industrial and value stocks after Trump's victory in the 2016 presidential election in the hope that it would lead to banking de-regulation, infrastructure spending, and tax cuts.
Instead, he said, growth stocks will likely continue to lead the market, while fiscal stimulus in the U.S. provided by the corporate tax cuts will help push emerging market equities higher by boosting inflation, he said.
"You typically don't see a style or leadership change" in the U.S. stock market until the start of an economic recession, he said. Until then, he added, "cash and short-term government bonds are more attractive than they've been in some time." - Reuters