Ukraine and the Islamic State dominate global risk appetite - Anyone have a nuclear bunker for sale?

 Week Commencing Monday 11th August 2014

This week in Brief

  • In the UK the market is waiting for the release of the Inflation Report where Mark Carney will be probed for further information on possible rate hikes. We also look forward to the unemployment rate and claimant count, all of which are expected to post in bullish territory.

  • In the US we have a reasonably quiet week with Retail Sales and the UoM the only releases of note. We expect sales to continue to push higher as we enter the summer buying season while the UoM is expected to increase marginally after last months disappointing result.

  • In Europe we expect the German ZEW to continue to decline as investors shy away from riskier assets amid growing tension in Ukraine and the Middle East. We also await the ECB’s monthly bulletin where we hope they will shed more light on what measures they have up their sleeve to taken the treat of deflation.

Overriding Market Themes

Starting this weeks market report with the UK, the deficit in its goods trade with the rest of the world widened in June as exports declined more rapidly than imports (a further indication that the economic recovery continued to be largely dependent on domestic demand). The Office for National Statistics said on Friday last week that the deficit widened to GBP 9.4 billion form GBP 9.2 billion in may. This is due to a fall in exports by 1.6 percent and imports falling by a mere 0.4 percent. Diving into the figures, the decline in exports war led by energy products, aircraft and ships while the decline in imports was led by fuel. Trade remains a disappointment for the UK as many of its key export markets in the Euro zone continue to grow weakly, if at all. Unfortunately with the current tensions in Ukraine, coupled with Italy returning to recession, this may well be a more long term problem than many were originally predicting.

Moving to Italy, the Italian economy shark in the second quarter, according to official estimates released on Wednesday. This took many market commentators by surprise and provoked concerns that violence in Ukraine and tensions with Russia could be pushing the broader Euro zone back into recession.  Italy’s GDP contracted 0.2 percent from April through to June, as compared with the first quarter of 2014. It was the second consecutive quarterly decline, thereby meeting the most common definition of a recession (GDP shrank by 0.1 percent in the first quarter). This is further discouraging news for the embattled ECB president Mario Draghi, who no doubt will face even greater calls to outline some extraordinary measures which the ECB can do to try and bolster domestic growth within the zone.

Moving more broadly into the ECB, the bank decided to leave rates on hold last week, thereby keeping its benchmark interest rate at 0.15 percent. He declined to use any unorthodox methods to try and kick start economic growth amongst the 18 member blow, instead saying that proper reform in countries such as Italy and France would help the Eurozone much more than a knee-jerk reaction to slower growth caused by a trade war with Russia. He did repeat that the ECB would take further steps if developments threatened to push the Eurozone into a deflationary spin, and acknowledged that we are likely to see significantly slower growth in the next few quarters if the geopolitical situation gets any worse.

GBP This Week

In the UK, all eyes will be on the inflation report set to be released on Wednesday. There seems to be a growing difference amongst the members of the MPC as to the best timing for the first increase in the Bank’s headline interest rate. We do not expect there to be any fundamental shifts in the current forward guidance model, however we could start seeing some more detailed explanation as to what the MPC are looking for to precipitate a interest rate rise. We would imagine the bank to place some more emphasis on nominal wage growth as a key determinant of interest rate increases.

The employment report due out the day before should also stoke some significant market volatility. The claimant count has continued to post strong declines, with the past five out of six readings better than the estimates. Another strong reading is expected in July, with an estimate of -29.7k. The unemployment rate has been steadily dropping in 2014, and the downward trend is expected to continue in the upcoming release, with an estimate of 6.4 percent.

USD This Week

The US markets are looking relatively quiet in terms of economic releases this week, however it is likely that investors will instead focus on the growing tensions between the US and Russia and between the US and the Islamic State. US jets continued to bombard Islamic State artillery positions in northern Iraq on Friday, the first of what is expected to be a series of American strikes meant to halt the Sunni extremist advance on the Kurdish capital of Erbil.

That said, investors will likely watch the US retail sales release on Wednesday, especially given its solid rise in July. Many analysts expect retain sales to continue to post decent figures, with the indicator expected to gain 0.2 percent this month, while the core sales are also predicted to edge up by 0.4 percent.

Finally, we expect the University of Michigan Consumer Sentiment indicator to improve once again to 82.7 on Friday. This comes as consumer sentiment declined in July to 81.3 from 82.5 in June amid a fall in the consumer outlook index. Analysts had expected the index to reach 83.5. This most likely was a temporary blip, however it is worth noting the impact that recent geo-political events  could have on this figure.

EUR This Week

In Europe this week we also have a reasonably busy week with German ZEW followed by the ECB’s Monthly Bulletin. Starting with the ZEW, German investor and analyst climate declined in july for a seventh straight month, reaching 27.1 from 29.8 in June. This was mainly attributed to continued tensions in Ukraine and the Middle East. This month we expect much of the same, with the indicator expected to come in at a considerably worse 18.2.

Moving to Thursday, the European Central Bank is expected to release its monthly bulletin. In July’s release it mentioned that measures taken in June are expected to raise the inflation rate to around 2 percent. Furthermore, it mentioned that the bank was willing to adopt unconventional measures if required, both to boost economic growth while maintaining rates at their current historical lows. It will be interesting to see if they will provide any further clarification on what these measures may be, and the likelihood of their implementation. 


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