The risk-off sentiment continued last week, as geopolitical risks concerning Turkey took center stage. Further, continued trade tensions and sanctions created a contagion effect across emerging markets. Meanwhile, domestic data continued to remain robust, suggesting the Fed will continue with raising interest rates. Higher rates will only exacerbate economic conditions in emerging markets as borrowing costs increase.
I. U.S. Economic Data
Retail sales rose higher-than-expected in July, underpinning the likelihood of the Fed raising rates at its September meeting. July sales increased by 0.5% relative to expectations of 0.1%. Retail sales in July increased by 6.4% relative to a year ago.
II. Emerging Markets continued to take a beating. Trade rhetoric (between the U.S. and China/Turkey) and sanctions (imposed by the U.S. on Russia) spooked the markets drawing contagion concerns as it relates to emerging markets.
- U.S. relations with Turkey were further exacerbated as the U.S. has been calling on Turkey to release an American pastor suspected of espionage by the Turkish government. The Turkish government is also seeking the U.S.’s help for the release of a Turkish prisoner held by Israel.
- In response to President Trump’s announcement last week regarding double tariffs on Turkish imports, Turkey responded in kind by doubling tariffs on certain U.S. goods including automobiles, tobacco, and alcohol. The lira rebounded about 6% on the back of the announcement.
- Earlier in the week, European banks with exposure to Turkey continued to take a hit equity wise.
- Further, as the U.S. continues to tighten its monetary policy and raise interest rates, it increases the cost of borrowing for many emerging markets. The impact of the aforementioned U.S. policies (trade/sanction/monetary) produced knock-on effects:
- Currencies in Mexico, South Africa, India, and Indonesia were all on the decline earlier in the week.
- EM stock indices have taken a hit. The MSCI world ex-USA falling nearly 3% this quarter, while the S&P 500 on the rise of about 3%.
- The recent “flight-to-quality” shift has pushed U.S. Treasury yields lower across the curve.
- Mexico held NAFTA renegotiating talks with the U.S. on Friday with Canada on the sidelines.
- The U.S. and Mexico may be nearing an agreement over rules governing whether cars made in North America can qualify for zero tariffs under the existing pact.
- U.S. Treasury rates ended the week higher with the 10-year Treasury note rising to 2.873% on the back of a report that Chinese and U.S. negotiators are drawing up a “road map” for talks to end the trade war.
This week:
Domestically, the market will be focused on the FOMC minutes to be released on Wednesday for any changes regarding the Fed’s outlook.
Other key data/events include:
AUD RBA meeting minutes (Tuesday)
JPY all activity index (Tuesday)
GBP inflation report hearings (Wednesday)
CAD retail sales (Wednesday)
FOMC minutes (Wednesday)
Swiss industrial production (Thursday)
German/Eurozone/U.S. Markit data (Thursday)
German GDP (Friday)
U.S. durable goods (Friday)
U.S. Economic Data includes:
Redbook index (Tuesday), existing home sales (Wednesday), FOMC minutes, weekly jobless claims (Thursday), housing price index, new home sales, Markit manufacturing/ services and composite PMI data, durable goods (Friday), Baker Hughes oil rig count.
Overseas Economic Data includes: German PPI (Monday), EUR construction output, AUD central bank minutes (Tuesday), JPY all industry activity index, Swiss trade data, GBP public sector net borrowing, NZD retail sales, GBP inflation report (Wednesday), Cad retail sales, JPY foreign investment stocks and bonds, JPY economic index (Thursday), Swiss industrial production, German/Eurozone Markit manufacturing/services/composite PMI data, EUR ECB monetary policy meeting accounts, NZD trade data, JPY national CPI, German GDP (Friday).
