Market movers for the week ahead - Rabobank

According to analysts at Rabobank, this week, trade concerns will probably continue to dominate headlines, in part owing to the G7 summit on Thursday & Friday.

Key Quotes

“The ensuing safe-haven flows, together with the renewed bear flattening in US rates –causing further compression of US-EM rate differentials– emerging markets may continue to find themselves in a tough spot, and Turkey in particular.”

“After the earlier sell-off in the Turkish lira, the currency had stabilised somewhat owing to the central bank's intervention. A 300bp emergency rate hike, followed by a simplification of their monetary policy to a single target rate, caused some respite. However, the central bank has lost significant credibility over the past weeks and as our EM FX strategist Piotr Matys noted earlier, the CBRT may have to follow up on the emergency rate hike with another rate increase at this week's scheduled meeting in order to re-convince the market. CBRT officials have told investors that they would undertake additional tightening if inflation continues to worsen, which makes today's Turkish CPI data key. Headline inflation is already in double-digit territory, and the weakened currency and rising oil prices will only add to this.”

“Renewed pressure on the lira should only strengthen the Bank's case for a rate hike. Although the lira is still some ways off the highs seen in the second half of May, USD/TRY has been on the rise again after Moody's warned that it may cut the countries rating on the back of lost investor confidence and an economic policy that is too “uncertain” to adequately address these concerns. The CBRT is certainly feeling the pressure to stabilise the currency: the Turkish manufacturing PMI declined to 46.4 in May, mainly driven by an unstable business climate and higher input costs due to the lira's plunge.”

“The data calendar will do little to offer a distraction from geopolitics and trade, with relatively little new information on the agenda. Eurozone GDP on Wednesday should not bring much of a surprise, since the advance estimate has been released already. This week’s update does come with a breakdown of the GDP components however, allowing for some digging to find the source of the sooner and stronger than expected weakening of European growth: was it lower external demand on trade concerns, or was the domestic dynamic also weaker? In addition, the ECB may be looking at German Q1 labour costs on Friday ahead of the Eurozone-wide estimate next week to see whether the initial signs of wage increases are continuing.”

“In the US, the manufacturing PMI is followed by the ISM index for services on Tuesday. While these sectors may be somewhat less prone to shortages in commodities for their production, they may also show signs of stress as a result of the trade tensions. If anything, their hiring will certainly be affected by the tight labour market that was also reported by manufacturers.”

“And finally, given Trump’s focus on “fairer” trade, the trade balance for April is likely to draw some attention – if not from the markets then probably from the President himself; either as ‘evidence’ that his policies are working already, or as a sign that he is right to push for better trade deals. The appreciation of the US dollar, effectively making imports cheaper relative to domestic production, will certainly not work in Trump’s favour during the coming releases.”