Take Five: The Dollar Takes Everything
The 12% rise in the dollar since the start of the year has caused global concern and will certainly be discussed at the meeting of G20 policymakers on July 15-16. Especially if it jumps to parity against the euro for the first time in 20 years.
UK policy, Chinese lockdowns, US bank earnings and central bank hawks are also worth watching.
Here’s your look at the week ahead at the markets of Dhara Ranasinghe, Tommy Wilkes and Sujata Rao in London, Jamie McGeever in Orlando and Kevin Buckland in Tokyo.
1/ DOLLAR, WE INCLINE YOU
The single European currency is the latest victim of the dollar. Now at a 20-year low around $1.016 EUR=EBS, it could soon reach eye parity, hit by the broad appeal of the dollar as a safe haven but also by soaring gas prices that have stoked risks recession in the euro area.
Wednesday’s data, which is expected to show headline inflation in the United States rose to 8.7% year-on-year in June from 8.6% in May, could cement bets on another big rate hike in the US. Federal Reserve and push the dollar higher.
The finance ministers and central bankers of the G20, meeting on July 15 and 16 in Bali, are watching. Tighter financial conditions have hollowed markets, and with the dollar so strong, a kind of “reverse currency war” is underway, where countries prefer stronger exchange rates to curb inflation.
2/ WEST WING (MINSTER)
The resignation of scandal-ridden British Prime Minister Boris Johnson means the world’s fifth-largest economy is still adrift, as the pound closes to its lowest level in two years and Britons suffer the worst squeeze in the world. cost of living for decades.
But while the Westminster drama dominates television screens, markets have sat quietly watching from the sidelines. This could change once the priorities of the new government are clear.
Nadhim Zahawi, appointed Minister of Finance just a few days ago, could review certain plans to increase taxes and reduce others. But if loosening the purse strings can support the pound, it could ignite inflation, which is already above 11%.
May’s GDP figures on Wednesday will likely add to the growth sluggishness, but don’t discount the possibility of Westminster chaos hitting markets.
3/ ON WALL STREET
US banks are kicking off second quarter earnings and it’s not pretty. Yes, higher interest rates are helpful, but economic growth is also slowing.
So while Refinitiv I/B/E/S estimates show overall S&P 500 earnings rising 6% annualized in the second quarter, financials are expected to see a 20% decline in earnings.
Much of this decline stems from the worsening outlook for loan losses, as rising interest rates increase the risk of borrower default. Accounting standards require banks to take macroeconomic views into account in loss provisions, and therefore in earnings.
Commission revenue could also stutter, predicts brokerage Wedbush, citing pressure from mortgages and capital markets revenue.
Morgan Stanley and JPMorgan released their results on Thursday, followed by Citi, State Street and Wells Fargo the next day.
Overall, the second quarter results should inform the outlook for profit margins, input costs and hiring. And listen to what business leaders are saying about a potential recession.
4/ COUNT THE COVID COST
Weeks after lifting an oppressive two-month lockdown, China is racing to contain a cluster of COVID cases centered on a karaoke lounge in Shanghai. With new cases surging, mass testing and new activity restrictions have been introduced.
The economic cost of draconian zero COVID policies will be highlighted on Friday, when China releases second quarter GDP figures.
Economists say the official 5.5% GDP target is out of reach, but President Xi Jinping remains committed to zero COVID policies, choosing “temporary” economic costs over putting lives at risk.
Investors are worried. Shanghai shares snapped their five-week winning streak as growth fears sent iron ore to a year low.
5/ HALF-POINT CLUB
When even central banks like Switzerland raise interest rates by half a percent, the Royal Bank of Canada and the Reserve Bank of New Zealand can hardly opt for moves of 25 basis points.
The RBNZ has already hiked rates five times in a row to 2%. Given that he expects rates to double to 4% in the coming year, analysts believe he will make another half-point move on July 13.
On the same day, the Bank of Canada could raise rates by 75 basis points to 2.25%, after making consecutive hikes of 50 basis points. It would be his biggest decision since 1998.
But watch for signs that rate hikes may be slowing. New Zealand business confidence is deteriorating and housing markets are easing. Canada, meanwhile, is assigned a 35% chance of a recession in the coming year.
Source: Reuters (compiled by Sujata Rao; editing by Sonali Desai)