E The Weekly Track – Dog Days -

E The Weekly Track – Dog Days

Jul 01, 2018Jeremy ParkinsonFinance0

The start of July and the summer heat wave comes between a week that is caught with the US Independence Day holiday and the World Cup. Most investors logically want to go home and cool off, the noisemakers are hard at work. In fact, July will be anything but a vacation for those watching geopolitics. The US President has meetings with NATO and European Union leaders as well as Russian President Vladimir Putin scheduled for July. We also get the longest lunar eclipse of the century and with the blood moon even more apocalyptic warnings. Throw in 2Q earnings and more China/US talks and you get the dog days of summer. Over the weekend, there were a number of key stories to unsettle markets:

US-Saudi side deal to increase oil output. According to Trump, the world’s largest oil producer will inject up to 2 million barrels a day to world oil markets — a figure Saudi officials did not immediately verify. This comes after oil hits 3-year highs over $74bbl and US consumers face higher prices at the pump at the peak of driving season.

Italy and France at odds over EU immigration deal. Confusion over the migrant deal has caused rifts to emerge between countries on the frontline of the migrant crisis and those without an external border. The proposal to build EU migrant centers has already prompted several countries, including France and Austria, to back away from participating in the arrangement. These remarks caused Mr. Conte to say that French President Emmanuel Macron was “tired” when he spoke about not setting up an asylum center.

China Jun NBS Manufacturing PMI drops to 51.5 from 51.9 – weaker than 51.6 expected. The Service PMI 55 from 54.9 – as expected. Slowing China economy fears continue wrapped around credit and US tariffs.

AMLO expected to win in Mexico but violence rocked the election. The risk consulting group Etellekt said that more than 50 candidates have been killed since the beginning of campaigning last September, along with dozens of political workers. Obrador is ahead in the polls going into today’s vote – with 37%. There is no run-off election, and that means he is likely to beat the more conservative Ricardo Anaya of PAN and Jose Antonio Meade of current president Enrique Peña Nieto’s PRI, who have been polling below 20%. As well as a new president, Mexicans will be voting for 128 senators and 500 deputies in Congress as well as state and local officials. In all, 88 million people will be eligible to vote.

What these stories point out is the driving force of growth and confidence data and how central bankers react to them against the seemingly never-ending string of negative geopolitical headlines as populist politics and nationalism erode the faith in globalization and government institutions. The rise of Asia – particularly India and China – as world superpowers in terms of growth and economic importance describes the last 50 years and the present storm puts some of this into question but not all of it. The ability for the world to continue to lift up the people and add another 1 billion to the ranks of the middle-class rests on getting this moment right and some of that is seeing Europe return to growth, the US trade policy turn positive with real bilateral deals, and China stabilize with more reform, more confidence. The dog-days of summer are just that a few days of heat and stagnation, but they don’t last, like fear in markets, they pass.

Question for the Week Ahead: Is US growth in 3Q going to reflect a hit to confidence? The markets ended last week with an upbeat mood. This reflected hope that Trump would back down from extreme tit-for-tat tariffs – as the fear of a global conflict over trade turns real. July 1 brings Canada tariffs, July 6 brings Trumps decision on China and likely retaliation. The Friday rally also reflected hope that the worst case for Italy and Merkel were wrong and that the markets would see a longer summer. Value in carry and EM remains a key hope for many that witness the significant pain in EM FX, stocks and bonds in 2Q. The biggest issue for many investors is in the US outperformance in growth and so in the FOMC rate hiking to continue. This feedback loop of geopolitical fears to consumer confidence is essential to getting 3Q trading right. The hit of US confidence in 2Q was minor and while many will make the slower personal spending an issue for 2Q growth – the rate is still well over 3.5% in most now casting models with some still over 5%.

The cost of energy in 3Q seems to be the big issue to watch as it bleeds into inflation and into how central bankers react. The US PCE/CPI are both over the FOMC target. If the jobs report in the week ahead proves to be strong the room for the FOMC to pause because the rest of the world is squeamish over US trade policy or because of political noise at home becomes less important. The risks for the week ahead revolve around the data, the way the FOMC reacts to it and the confidence of business and the consumer to put it all into perspective.