Win or loose, Abenomics is here to stay...

Week Commencing Monday 17th August 2015

Overriding Market Themes

We start the week with Japan, where weaker consumer spending and exports have led to the economy contracting in the second quarter. The Cabinet Office said gross domestic product fell at an annualised rate of 1.6 percent in the three months through June. Japanese growth rates have seen some extreme fluctuation in recent quarters, with this latest downturn erasing most of the gains seen in first quarter GDP. The same can be said of consumer spending, which surged before a sales tax increase in April 2014, lifting the economy to its fastest pace in years before eroding afterwards. The slowdown is a setback for the government of Prime Minister Shinzo Abe, which has been trying to pull the economy out of nearly two decades of deflation through a stimulus program known colloquially as Abenomics. The program involves the central bank injecting vast amounts of cash into the economy, which has kept borrowing costs low and weakened the yen and boosting exports. Unfortunately however, while Abenomics has increased profits at big corporations and lifted the stock market, many ordinary Japanese say they feel few benefits. Many believe that this GDP release will disappoint, but things will improve sooner rather than later. With one of the lowest unemployment rates in the developed world, and a head start in the currency wars, we expect the Japanese economy to be well placed to capture what little growth we will see in the world this year.

Moving over to Europe, Angela Merkel has said that she expects the International Monetary Fund to contribute to a new EUR 86 billion bailout for Greece. Mrs Merkel, who is battling her own MP’s in the Bundestag over the proposals, is insisting that Christine Lagarde would ensure the funds precipitation should conditions on Greek pension reform and debt relief were met. Representatives from Merkel’s Christian Democratic Union and its Bavarian counterparty, the Christian Social Union, want the IMF involved because of its reputation for rigorous scrutiny. Lagarde herself has been pushing for European countries to offer some form of debt relief to Greece, and in a nod to her Merkel said there was room to ease the burden on Greece by extending the maturities on its debt and reduce interest rates. The timetable for the new deal is tight. Greece’s next payment deadline is Thursday, when it is required to repay EUR 3.2 billion to the ECB. Eurozone leaders also said last week that the first EUR 26 billion of the new bailout package will be released on Thursday morning, although Greece would only see half of that immediately. The first EUR 10 billion would be reserved in Luxembourg for the recapitalisation of the Greek banks, while a further EUR 3 billion would be disbursed over the next few months subject to Athens delivering on its economic pledges.


GBP This Week

UK inflation is likely to continue its path away from the Bank of England’s 2 percent target in July, further encouraging the central banks dovish stance and further cementing our view that GBP/EUR shall see only gradual upside, while GBP/USD should see continued downside. Moving to Thursday, we expect UK retail sales to recover versus the surprise downside print last month, potentially to the tune of 0.5 percent on the month.

USD This Week

We expect to see a reasonably bullish greenback over the next few weeks as global currency devaluations continue to add pressure to the currency. Fears around China’s currency should continue to push international investors away from riskier assets and into the relatively safety of US treasuries. We believe that the FOMC have now no choice but to raise interest rates either next month or October, Furthermore, we expect the path of rate normalisation to be more important to markets than the actual rate hike, so should we see some form of “hiking policy” introduced by the Fed, expect the Dollar to perform extremely well.

In terms of data, we are really only concentrating on the Philadelphia Fed Consumer Sentiment Index, which we expect to increase versus last month’s print. Seasonally we are entering a decent period of consumer spending, and given the continued growth in GDP numbers from the US we expect a reasonable uptick in this index.

EUR This Week

We have a relatively quiet week ahead for the Euro, with EZ flash PMI’s on Friday the only release of any note. We forecast manufacturing PMI to drop slightly on the month, with a print of 52.3 versus 52.4 last month. Services PMI should also see a drop to 53.6 from 56.0. These, coupled with relatively weak GBP numbers falls in line with our expectation of a weaker EUR as we draw towards the end of the month.



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