of the week ahead


Matt Jones

Welcome to "The Long & Short of the Week Ahead", a production of Eurizon SLJ Capital that takes a look at the macro-economic themes of the week ahead and has been recorded for professional investors.

My name is Matt Jones, Head of Distribution for Eurizon SLJ Capital, and I'm joined by Neil Staines, Senior Portfolio Manager.

Welcome, Neil.

Neil Staines

Hi Matt.

Matt Jones

So as we look at the week ahead and we are basking in recent events, I think it's fair to say that the week ahead is a game of two halves when it comes to confidence, certainly rising confidence in international football, but perhaps declining confidence when you look across markets. So as we look at the week ahead, what are you going to be focusing on next week?

Neil Staines

Yeah, thanks, Matt. Absolutely. I think it's been a little bit of an unusual week for financial markets or for the macro backdrop, one that has seen a rise in uncertainty or a fall in confidence about calls across the markets. It's likely on a combination of global factors, one on the rise in global covid cases which has been very clear across Asia and some of EM bringing in tighter restrictions and economic concerns there in. There's been a more audible debate about the China slowdown, something that followers of our research will note that we've been talking about since the end of Q1, but has been brought further to light at the end of this week with a RRR cut from the PBoC. So, you know, at the center of all of this has been the US bond market. And I think this is the most important driver for sentiment and for market movements. And we've seen quite a dip in US Treasury yields. You know, some of this, I think, has been put down by markets to a focus or an emphasis about being past peak growth in the US. And this is added to those concerns. However, we also think that there is a significant implication from the U.S. and the US bond market, as the global safe haven asset. So, you know, this kind of Delta variant concern, the China slowdown concern has driven these safe haven flows into the US bond market. And we think that the yield drop is not a more sinister prophecy for US growth. And ultimately, we see this as supportive for U.S. growth and for US equities.

So throughout recent months, the focus on inflation has been core to market sentiment. On Tuesday, we get the US CPI prints for June. Central expectation is four point nine percent on the headline. That's from five percent in May and a tick up in the core measure to four percent from three point eight percent in May. Now, the Fed has done a good job of convincing markets generally that this inflation is transitory. Nonetheless, it's likely remain sticky in the near-term and with oil and commodity price action definitely helping this stickiness, certainly in terms of sentiment. But recent concerns about global growth may weigh in the other direction.

Secondly, we get China, Q2, GDP. Now we've got a more sanguine view of near-term China growth trajectory for many months now. But why the markets seem to have focused their attention on this in the past week. Q2 is expected to be around one percent quarter on quarter in Q2 as a sequential acceleration from Q1, which just stood at point six. But it's a level that's still relatively pedestrian for China. There've been some recent covid outbreaks of muted travel and by extension, services expenditure, and we think that dampened the recent service sector momentum in the economy. However, this week's RRR cut should provide some support to sentiment in the economy, the supply of credit and general activity in the near term. The data will be closely watched as it's a function of global growth sentiment. And as we've mentioned on previous podcasts, the reliance of exporters to Chinese demand to be a key factor here. Germany is top of that list. So interesting to see how that plays out for Germany in the medium term.

And then lastly, on the monetary policy front, we have the RBNZ, Bank of Canada and Bank of Japan in the week ahead. The risks marginally towards a hawkish surprise from the RBNZ, still a bit too early likely, but the economy is close to being back to normality now after almost no cases of covid, despite the fact that New Zealand is shut off to the rest of the world, the economy seems to be going fairly strongly there. And the market is not really pricing rate hikes until the turn of the year. So a marginal possibility of a hawkish surprise there. And then to the speakers. Legarde speaks next week following the ECB monetary policy review. And any further commentary on that front will be closely watched. In our view, essentially, it's a semantic change on the symmetry of the policy target and has little direct impact on the near term. It's interesting to note that the German contingent suggested that the ECB will not deliberately seek inflation overshoots and in fact is likely that the problem for the ECB is on the other side of the debate, that the effective lower bound is a constraint for symmetry, or there is very little that the ECB may have up its sleeve to do to encourage inflation to target over the medium term. It also highlights the current issues for the ECB. Foot to the floor in a monetary policy sense and still demand led inflation is at a shortfall for the forecast horizon. This is really a key factor for us going forwards. And then lastly, we have the Fed. So the the semiannual testimony to the House and Senate or Humphrey Hawkins, as it was called in the old days, and any commentary on economic progress following up from the Fed minutes which didn't really shine any light on the on the viewpoint of the Fed, given the increased confidence in the growth backdrop, interestingly, which has coincided with a more disappointing confidence from the markets in the global economy. But there is a real serious focus on the implications of this for the U.S. yield curve.

Matt Jones

Thank you, Neil. So a big week ahead when it comes to macro events and in the meantime, a big weekend ahead of us as well. Do I need to ask what you've got your eye on this weekend?

Neil Staines

Yeah, absolutely. Matt, there's plenty to focus on this weekend. You know, we've got the Wimbledon finals, both men's and women's Berrettini, someone to clearly look out for in the men's and little to choose between Barty and Pliskova in the ladies final. Formula One has a week off ahead of the British Grand Prix. Silverstone In two weeks time, where one hundred and forty thousand fans will be cheering, cheering the drivers around the track. Lions rugby this weekend. Sadly, due to Covid, it will be a rematch of Wednesday's match, which wasn't much of a competition for the Lions. And then finally, I think it will be difficult, not to mention the Euro 2020 final with England versus Italy and certainly two teams matched in that defensive ability. And unusually for England, dare I say it, in their attacking flair this year, I think it would be remiss of me not to say this time around and football's coming home.

Matt Jones

Thank you, Neil. And fingers crossed for great results on the weekend. I'm sure the nation is going to be watching with with an equal measure of pride and nervousness. Thank you very much for joining us again and and sharing your thoughts on the week ahead.

Thank you for joining us for "The Long and Short of the Week Ahead". Further insights are available on our website eurizonsljcapital.com/insights. We look forward to you joining us again next week for more insights into macro-economic events and "The Long and Short of the Week Ahead".


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Views accurate as at the time of publication. Opinions expressed by the authors are their own and do not necessarily reflect those of Eurizon SLJ Capital Limited, Eurizon Capital SGR or the Intesa Sanpaolo Group.
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