LONDON (Reuters) – 1/LIRA LOW
August generally is a difficult time for markets. It was the month Russia defaulted (1998), China devalued the yuan (2015) and BNP Paribas kicked off subprime meltdown by freezing three of its funds (2007).
A lot might go incorrect this August because the world financial system staggers underneath the pandemic, Sino-U.S. tensions bubble and the U.S. election contest will get ugly. Now watch Turkey, vulnerable to repeating the 2018 lira disaster.
The lira tumbled 2% in opposition to a weakening greenback in July, and there’s little ammunition to defend it. Coverage credibility is low, Ankara is sparring with a number of overseas powers and actual charges are adverse. The 20% year-to-date forex loss in opposition to a euro-dollar basket is elevating unease over Turkish debtors’ onerous forex debt pile.
In January 2014, the central financial institution abruptly upped rates of interest by a number of share factors to elevate the lira. Related motion might forestall one other August of misery.
Graphic: Turkey’s overseas reserves underneath strain – tmsnrt.rs/2BJL46a
2/LOCKDOWN BLUES TO BEATS
At half-time for the Q2 earnings season, it’s showering “beats” each side of the Atlantic. Analysts, flying blind as corporations withdrew steering on the peak of the pandemic, have been maybe too pessimistic.
Right here’s the scorecard on 250-plus corporations which have up to now launched numbers in every area: 80% of S&P500 corporations beat estimates, versus 65% of European companies, Refinitiv IBES knowledge exhibits.
Whereas industrial names corresponding to Common Motors and Caterpillar delivered large constructive surprises, the season additionally cemented U.S. tech’s hegemony; Amazon reported its greatest revenue ever, Fb smashed estimates and Apple iPhone gross sales surpassed expectations.
However whereas beats are available in left, proper and centre, it’s not been sufficient to maneuver the needle on inventory markets, which had already written off second-quarter outcomes attributable to lockdown blues.
Graphic: Earnings outlook MSCI World –
3/HOW LOW CAN THEY GO? How a lot additional can Treasury yields drop? The document Q2 U.S. financial contraction despatched three, five-and 20-year yields to document lows. Your complete yield curve is near falling underneath 1%.
A recent set off for additional falls may very well be July’s unemployment figures. June payrolls surged by 4.8 million, surpassing expectations of three million additions, whereas July knowledge on Aug. 7 is predicted to point out a 2.2 million enhance.
Weekly jobless claims in the meantime proceed to rise. As a supplementary jobless advantages scheme expires, probabilities of a yield uptick seem slim. Graphic: Jobs numbers –
A raft of upcoming Chinese language knowledge will present us how the financial system is recovering from the coronavirus. Explicit focus shall be on commerce figures due Aug. 7, which additionally provide a check-in on the U.S./China commerce deal.
Imports rose final month for the primary time for the reason that pandemic hit, exhibiting a powerful rebound in purchases from the US. However extra large will increase shall be wanted if farm items shopping for is to match formidable targets.
Sector element shall be absent from Friday’s figures. However with Sino-U.S. stress simmering earlier than conferences scheduled in August to evaluate the Part 1 deal’s progress, proof of strong shopping for can be a very good signal.
Graphic: China agricultural imports from the US –
5/BOE TO SAVE BULLETS
Just like the ECB and Fed at their newest conferences, the Financial institution of England may select to take a seat again and assess financial restoration at its Aug. 6 assembly. It’s among the many central banks holding out in opposition to adverse rates of interest; analysts reckon it gained’t transfer its borrowing prices till end-2021.
Some are stunned by markets’ reluctance to strain the BOE for charge cuts. Indicators are restoration shall be gradual and the UK must seal an EU commerce deal earlier than the Brexit transition interval ends on Dec. 31.
However the BOE stance could also be prudent. As an alternative it might choose so as to add one other 70 billion kilos to its bond-purchase plan, after a 100 billion pound enhance final month.
With the clock ticking on the Brexit deadline, the BOE could wish to maintain on to its remaining bullets.
Graphic: UK rates of interest –
Reporting by Sujata Rao, Tom Arnold, Saikat Chatterjee and Thyagaraju Adinarayan in London; Tom Westbrook in Singapore and Megan Davies in New York; Modifying by Alex Richardson