Asian equities are poised to open lower following Friday’s selloff that stemmed from a robust employment report that did no favors in fueling rate cut bets for the Fed. Markets remain convinced the Fed will cut rates at the end of the month, but the strong labor market have many questioning whether we will see just two rate cuts in 2019 and not what some call the required three to see US stocks make another 3-5% push higher into uncharted territory. Much of the focus this will week will fall on Powell’s testimony before Congress, the Fed’s Minutes and any incremental update we see on the trade front.
Markets seem hooked on figuring out how big the punch bowl will get once the Fed commits to easing at the end of the month. With the PBOC, ECB and BOJ all poised to unleash more stimulus, the path for higher equities seems to require softening data in the US, but nothing too strong that will derail the US consumer. This week’s CPI and trade data globally will likely highlight the effects of the trade war and should support the calls for additional stimulus globally.
Greece’s center-right New Democracy party leader Kyriakos Mitsotakis will become prime minister on Monday. The 51-year-old Mitsotakis victory shows markets that Greece is going back to supporting the main stream party. Outgoing populist, Prime Minister Tsipras helped Greece get out of deep austerity measures that crippled the economy in 2015, but now with the economy in recovery mode, Greece is looking for someone deliver more market friendly measures.
If Mitsotakis does not win a majority, he is expected to form a coalition with a centrist party. He has a business-friendly approach which will likely see him try to reduce taxes. He will likely seek to renegotiate budget surplus terms with the EU and that should be the beginning of a new struggle that ultimately should be positive for the Greek economy.
President Erdogan fired Murat Cetinkaya, the head at the Turkish central bank (CBRT) in what was probably growing frustration over not cutting interest rates. Central bank independence does not exist in Turkey and the lira will suffer. The Turkish president wants low-interest rate policy put in place and the CBRT has pledged to keep policy steady in the current tightening cycle as inflation continues to remain three times above their target.
Erdogan is under growing pressure after losing the rerun mayoral race in Istanbul. Turkey’s recession is being blamed on Erdogan, who made the push for increased bank lending and public spending, only supporting a temporary relief in the economy. The political stimulus effects faded, along with a weaker lira, and higher interest rates will continue wreak havoc on the Turkish economy. The central bank next meets on July 25th.
Crude prices are likely to struggle at the start of the week as Iran seems ready to seek nuclear talks with European nations and as global economic uncertainty continue to hamper the demand outlook for oil. Geopolitical risks remain plentiful, but the start of the week could see Iran worries ease. While the diplomatic pathway between Iran and the US seems closed, it certainly is open with Europe and that could be positive for bringing stability to the Middle East. In what is likely a political posturing move, Iran appears set to abandon the uranium enrichment levels agreed to in the 2015 nuclear deal. Sunday was the end of a 60-day deadline Iran issued European nations for delivering some relief from the US sanctions. Iran reportedly is ready to issue a two-month extension, a move that should highlight they really want to work something out with Europe.
Another big part of what will drive oil prices later in the week will be if we see a major dollar reversal. The spotlight will shine on Jerome Powell’s testimony. The Fed chief will explain if the surprising strong US jobs report, which continues to show amazing strength this late, in the decade long expansion, will only warrant limited rate cuts and a patient stance on whether more will come afterwards.
Oil is likely to struggle delivering strong gains until we see the convincing argument for the dollar to weaken. Growing Fed rate cut expectations, improved demand outlooks from stabilizing data from Germany or trade war progress are all likely catalysts for higher oil this week.
Economic uncertainties around the world will likely keep demand steady for gold prices. Recent weakness stemming from falling Fed rate cut bets should be temporary as the broad weakness from Europe and Asia will likely see their respective central banks deliver significant stimulus in the coming months. The Fed is still likely to cut rates at the end of the month, and even if they go one-and-done, the ECB and PBOC are just around the corner in pumping up their economies.
The cryptocurrency markets have been on a mission to deliver wide range interest that will attract retail, institutional and mainstream commerce interest over the past several weeks. With social media giant Facebook entering the digital coin space, all coins have benefited on renewed interest. Bitcoin remains the bellwether that has yet to be threatened by other altcoins and we should not be surprised if it eventually makes a complete recovery of the $16,000 plummet that started at the end of 2017.
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