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 back, Neil. Great to have you with us again.
It's great to be here, thanks Matt.
Looking into the week ahead, I think it's definitely fair to say it's a bit of an alphabet soup of acronyms really from the SPD, FDP, PMIs and, looking to the weekend, AJ back in action. So as you're looking into the week ahead, can you just run us through what it is you're going to be looking at.
Yes, absolutely. Thanks for that, Matt.
To start the week, we've got the German elections on Sunday. Overall, the polls suggest that the centre left SPD will be the biggest party and that Olaf Scholz will take over the Chancellery after 16 years of CDU-CSU under Angela Merkel. However, a poll at the end of this week has suggested that that might be a little bit closer than expected come Sunday. Now, as far as the markets are concerned, however, there may be little near-term impact - the shift to the left and therefore potential for further fiscal expansion or even a greater desire for fiscal transfers or even debt mutualisation, are kind of countered by the fiscal conservatism of Scholz. He's likely more fiscally conservative than his party, and that's likely a factor in his current lead in the polls. There's also the balancing weight of the potential kingmakers in the centrist, pro-business FDP, who will also play a part in maintaining a relative status quo across Germany. Now, we won't know the final coalition agreements for some time, but the weekend will give an important indication of who takes Merkel's chancellorship and ultimately a key role in the future of the EU.
Next week also sees important China PMI data for September. Now, August data was very disappointing, but driven largely by the restrictions surrounding the Delta outbreak and the knock on impact from the floods. This month, the key barometer will be closely watched with respect to recent focus on credit and specifically on Evergrande. From our perspective, there have clearly been wrongdoings at Evergrande; [but] the suggestion that this is a Lehman moment is clearly inaccurate. From a credit or contagion perspective, Beijing remains in control. The issue is likely more of a macroevolution story and it likely exacerbates the slowdown that has been evident since February directly through the very important housing channel. But I think that's really where the core focus comes in terms of the China slowdown and the implications for the rate space. The September PMI data is likely an important focal point for the evolution of China's near-term growth projections and therefore has big implications for rates and effects markets more globally.
And lastly, while we have little first tier data from the US, the focus on the US likely continues to dominate. Now the hawkish FOMC relative to expectations this week is an interesting case in point. The dots now point to a rate cycle which starts in 2022 and sees 1.75% by 2024. This is opening up important rate differentials in global markets. Growth forecasts also remain bullish throughout the forecast horizon, despite the transitory implications of Delta and supply chain disruptions. As we move into Q4 next Friday, the focus on the taper announcement likely in November and more pressingly, the debt ceiling resolution will also be a key focus for the US. The continued growth outperformance, at least relative to DM, means that capital flows into equities and the dollar and even debt, even though we see rates moving higher, likely to continue.
Thank you, Neil. That certainly clears up the serving of alphabet soup, so much appreciated. Looking to the weekend, though, I think we are equally spoilt for choice. You mentioned in last week's podcast that you perhaps wouldn't be venturing out much this weekend. So tell us what you have your eye on.
Absolutely. Thanks very much, Matt. There is plenty to keep your attention this weekend.The North London Derby, Tottenham-Arsenal; Formula One is back with the Russian Grand Prix from Sochi - Verstappen takes a three place grid penalty after the crash last week, but I don't think that's going to influence the race, it's going to be very tight between Max and Lewis; there's some more hard hitting Southern Hemisphere rugby, New Zealand-South Africa; and talking of hard hitting, AJ's back in the ring against the very talented Ukrainian Oleksandr Usyk -I'm sure that's pronounced incorrectly. My prediction: early trouble for AJ, but overpowering him by the 8th. But for me, this weekend is all about one thing, and it's the Ryder Cup. The course is set up for the big hitting Americans, but world class golf in the atmosphere, somewhere between wrestle mania and the world darts from the Circus Tavern make it a spectacular like no other and I certainly won't miss a moment.
Fantastic. Definitely a weekend with something for everybody. Well, thank you very much, Neil, for your time once again. We look forward to catching up with you again next week.
It's a pleasure. Thanks, Matt.
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