The Week Ahead: Headline Havoc in Full Effect

Wow! No, not the breath-taking innings by the maverick Englishman yesterday afternoon. That deserves a special tome of its own. We are referring to the significant escalation in the trade war on Friday and the volatility that ensued. 

Jerome Powell’s Jackson Hole speech was supposed to be the most important event of an otherwise sleepy August day, but it did not quite work out that way. Not only did Powell’s speech barely make the top three events of the day, but othernews flow resulted in a huge amount of volatility and one of the largest drops in stock markets this year. 

Firstly, China shocked the markets by announcing that it would retaliate against the latest Trump trade moves by slapping 10% tariffs on another $75bn in US imports, which sent stocks sharply lower. Powell’s speech and remarks shortly after managed to stabilise sentiment somewhat as the Fed Chair didn’t reveal anything new with no mention of the ‘mid-cycle adjustment’. Stocks liked this perceived dovishness and managed to regain all losses.

Sadly, this didn’t last long as Trump came out firing / tweeting, firstly slamming Chair Powell, effectively calling him an ‘enemy of the state’. He then warned that he would strike back against China soon, while ordering US companies to find an ‘alternative’ to the country. 

The result was a violent lurch lower in risk assets with the Dow and S&P plunging over 2%, their third such drop in August.  Every sector was lower on huge volume and wide breath and futures are currently hovering around the widely watched 200-day moving average. Gold jumped higher hitting a six and half year high, but it was slightly surprising to see a fall in the greenback as the dollar index suffered it biggest one day drop in over a month. 

Friday’s events raise the risk of an all-out economic war between the US and China and in thin, summer markets, these moves have proved highly volatile with the VIX screaming higher. Significantly, USD/CNY has gapped up this morning well above the 7.10 level with China seemingly reusing its tactic of allowing the yuan to weaken further.

Regarding this week’s calendar events, UK MPs will return from their summer sojourn next week so we will be on the look out for some clues on whether the anti-hard-Brexiteers can find a common way forward to block PM Johnson delivering a no-deal Brexit.

In the euro area, the last inflation print before September’s ECB meeting gets released on Friday, setting the scene for the expected significant monetary stimulus package. Inflation has been falling recently and with the core print stuck around 1%, the July release will likely bring more ammunition to the doves.

Stateside sees the Fed’s favoured measure of inflation, the PCE data, also released on Friday. The core inflation rate is expected to be unchanged at 1.6%, although the latest CPI print surprised to the upside. We also get a consumer confidence reading and Q2 GDP print earlier in the week. 

However, in the current market environment, these indicators will likely play second fiddle to more tweets and trade headlines as the tit-for-tat war continues to get very hot.