Yellen back in the headlines...

Week Commencing Monday 14th September 2015

Overriding Market Themes

We start this week with shock news from the UK, where Jeremy Corbyn has grabbed the Labour leadership. The veteran anti-war campaigner known for his unapologetically socialist views won a landslide victory, destroying the other 3 candidates in the first round of voting. The outcome has delighted supporters and dismayed others who never imagined he could be elected. Indeed, many Labour “grandees” have speculated that this move may well make the party unelectable at the next general election. Considered an eccentric outsider and a longshot just months ago, Corbyn won many over with passionate arguments for nationalising industry, heavily taxing corporations and the rich, increasing spending and ending austerity. Although global markets have remained relatively uninspired by what is a relatively low level political news, things may well change fast should we see a surge in Corbyn’s polling. The Conservatives have cheered his election, believing that this sudden push to the extreme left will not sit with British voters, however they may well be surprised. We will have to wait and see whether this stalwart of “old labour” either destroys the party, or gives it new meaning!

Moving over to China, further Chinese economic reports continue to challenge Beijing’s assertions that it will reach its full year growth target of 7 percent, with factory production and fixed asset investment were both weaker than expected in August. The data released Sunday pointed to continued weakness across large swaths of the world’s second largest economy, heaping more pressure on the government to seek to further action to stimulate activity. China’s industrial production grew 6.1 percent (y-o-y) in August, according to the National Bureau of Statistics. While this was marginally faster than July’s 6 percent level, it compared with an already very low reading in August of 2014 and fell well below the market expectation of 6.6 percent. Fixed asset investment in non-rural areas of China rose 10.9 percent in the January-August period compared with last year’s figures. This was also below expectation and slower than the 11.2 percent increase recorded in the January-July period. Economists continue to expect China to cut the required bank reserves ratios in the next few months, while also putting further pressure on local government officials to accelerate infrastructure spending in a bid to boost growth. Either way, a Chinese slowdown is and has spooked markets, and with an aging demographic and a generally unskilled population, the future looks tough for the far eastern tiger!

 

GBP This Week

With the Bank of England more dovish that expected last week, we were surprised by the GBP strength seen against both the USD and EUR. The report showed considerable optimism on the domestic outlook, however they was concern that recent global developments will catch the UK in its crossfire. This morning, we have seen some of these GBP gains sell back.

In terms of data, we forecast this week’s CPI inflation on Thursday to post a positive print of 0.3 for the month. This coupled with last month’s 0.1 percent print does show a positive trend, however it is far from the BoE’s 2 percent target level and thus may still be perceived negatively by markets. Wednesday’s unemployment report should also be interesting, even with the rate of unemployment expected to remain at the 5.6 percent mark. Earnings should continue to pick up by 2.7 percent in the quarter, which the claimant count should also decrease by a marginal 2.5k. All things being equal, a reasonably fair week is expected for Sterling, with the exception of Thursday’s crucial FOMC meeting in the US.

USD This Week

In the US all eyes will focus on the FOMC meeting on Thursday, and brace yourself for some significant volatility. Although we continue to believe recent economic indicators from the US justifies a rate hike, current global conditions may well delay such a hike. Furthermore, futures markets continue to price the likelihood of a rate hike this week at roughly 30 percent, and it is unlikely the FOMC will want to upset what are already extremely volatile markets. Either way, this is the event to watch!

Outside the FOMC, retail sales on Tuesday should show an increase of 0.2 percent in August. Also on Tuesday, manufacturing production is likely to decline marginally on the month, hurt by continued US Dollar strength, with the indicator expected to come in at -0.4 percent. Finally, August inflation figures are likely to be confirmed in at 0.1 percent on core and flat on non-core.

EUR This Week

We have a relatively quiet week ahead for Europe, with Euro area Industrial Production expected to show a positive print on Tuesday of 0.6 percent for the month (especially good after 2 months of consecutive decline). Inflation should remain relatively depressed, and we expect both core and non-core to be confirmed in at 1.0 percent and 0.2 percent respectively.

We continue to believe the ECB will announce a extension to the current QE program at some stage before the end of the year, especially given inflation remains so low. With this in mind, we continue to believe EUR weakness is the main theme for the year and continue to recommend shorting the single currency.

 

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