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The volatility guide to key event risk in the week starting Aug 12

Chris Weston breaks down the risks for the coming week

While we continue to obsess over the
ever-fractured relations between Washington and Beijing, there are a number of
new big macro-related themes we should keep a beady eye on this coming week.
Notably, talk of a possible snap election in Italy, with the Deputy PM Salvini
due to update the nation on Monday. There has been talk that PM Conte will seek
a confidence vote, which could impact the EUR, at a time when traders have been
buying the single currency as carry positioning unwinds.

On the other side of the ledger, and more
positively, reports that Germany is eyeing a possible fiscal stimulus, which
one suspects they will handsomely take advantage of the negative yield
environment to borrow, and be paid to do so. The controversy is that the
renowned fiscally responsible nation would negate its balanced budget, through
increased government debt accumulation and spending. The talk is they would use
the funds to target climate protection, which would be somewhat more palatable
for a nation who has consistently demanded the likes of Italy, Portugal and
Greece reign in their fiscal deficit.

It’s hard not to think this could actually be a big deal, especially if we do
get Deputy PM Salvini going on to form a new, more populist government. With the
Italians due to renegotiate its budget with the EU in 2020, this dynamic will
become a market issue, and we’re likely to get more colour next week. All eyes
on Italian BTPs and whether the spread over German bunds increases.

The politics doesn’t stop there either, where in the UK, Boris Johnson
continues to reject the Irish Backstop. That will not shock in any way, but
there is growing momentum in the speculation (source: The Sun & The FT)
that a General Election could be held just days after the Brexit deadline on 31
October. This plays into one of my views that we could see a vote of no
confidence pulled on Bojo’s government when the Commons comes back from summer
recess on 3 September.

Politics dominates markets, although I have a beady eye on the US bond market,
where we could feasibly see the US Treasury 10-year ‘real’ (or
inflation-adjusted) yield turn negative next week. With the UST 2s vs 10s yield
curve now sitting at 9bp, we will see cries for an inverted curve next week,
and this fits in with the new macro view – bad news is bad news for market, and
lower bond yields will soon be negative for equity markets and see further love
into the CHF and JPY. With so many rates markets already priced at either zero
lower bounds, or deeply negative, we get closer and closer to the point where
markets see limited or no impact from changes interest rate. Only
unconventional monetary support will move the dial.

USDJPY already looks heavy, as any data miss this week, notably in CPI and
retail sales will see the 105.00 level tested.

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