Is this the most important week of the year?
Spoiler alert: almost certainly not.
And that’s not to downplay the long list of important scheduled events. Rather, it’s just to say that invariably, scheduled events never end up being the ones that matter unless those scheduled events are elections.
The two marquee events for markets this week are obviously the Fed and ECB meetings and I decided to eschew writing the usual Sunday evening week ahead preview in favor of in-depth posts on Powell and Draghi (and also in favor of eating pan seared Diver scallops at this new place that opened up down the street).
The fate of emerging markets is in Jerome Powell’s hands and Draghi is about to try and see what happens when price discovery is allowed to resurface in European bond and credit markets. You can read more than you probably care to know about the Fed meeting and the prospect of the ECB tweaking the APP forward guidance in the two linked posts there.
Obviously, markets are also having to contend with the fallout from the G-7 summit after which Donald Trump went on a series of ridiculous Twitter rants aimed at Justin Trudeau. Those tweets continued through Sunday evening and his sentiments were echoed by Larry Kudlow and Peter Navarro, with the latter telling Fox News that there’s “a special place in hell” for Trudeau (I guess that’s the section Satan keeps roped off for people who hug pandas and wear Chewbacca socks to Bloomberg panel discussions).
All of that after Trump delivered what was easily one of his most disjointed press conferences ever in Canada, where he proclaimed a “tariff-free world” like the ones he “learned about at Wharton.”
CAD isn’t taking that particularly well on Monday, but as Trump would say, “we’ll see what happens”.
One thing that’s already “happened” is that Germany and France have lashed out, calling Trump’s schizophrenic behavior what it is. Here’s Reuters:
“In a matter of seconds, you can destroy trust with 280 Twitter characters,” German Foreign Minister Heiko Maas said when asked about Trump’s U-turn, adding it would take much longer to rebuild lost trust.
Trump’s conduct was “actually not a real surprise, we have seen this with the climate agreement or the Iran deal”, Maas, a senior member of the Social Democrats (SPD), a partner in Chancellor Angela Merkel’s governing coalition, told reporters.
Trump withdrew the United States from the global deal reached in Paris in December 2015 to curb global warming, and last month from world powers’ July 2015 nuclear deal with Iran, asserting that it was one-sided in Tehran’s favor.
SPD leader Andrea Nahles accused Trump of turning the G7 summit into a disaster with his tweets and bowing out of his international responsibilities. “President Trump is creating chaos. Reasonable and reliable policy is not possible that way.”
On Monday morning, Steffen Seibert, Merkel’s chief spokesman, reiterated that U.S. tariffs on steel and aluminum imports are illegal under WTO rules and said the E.U. “is ready to take action”. European retaliatory measures “can take effect on July 1″, Seibert added.
Trump’s combative tweets came as he was literally en route to Singapore for negotiations with a child despot who executes people with anti-aircraft guns, starves his own people into cannibalism and threatened to nuke Guam just nine months ago.
But there’s a lot more going on this week than the Fed, the ECB, trade tensions and the Trump-Kim summit. There’s CPI in the U.S., for instance and a meeting between Putin and Mohammed bin Salman (with whom I have a mutual friend). Here’s Bloomberg on that:
Vladimir Putin, the Russian president, and Mohammed bin Salman, the powerful Saudi crown prince, meet at the opening game of the World Cup soccer tournament. The encounter could influence the global oil market given it comes a week before a crucial OPEC meeting in Vienna, providing a last-minute chance for the two leaders to iron out a possible oil-output increase.
For their part, BofAML says this may well be “the most important week of the year”:
Here are a couple of excerpts from their take followed by the event calendar for developed markets. Note that these excerpts do not include BofAML’s discussions of the Fed and ECB – I’m saving you some time by assuming you read our previews of Powell and Draghi last night.
Trade war risks likely will also dominate headlines next week and are likely to be the main theme for this summer, in our view. The US could be moving towards more trade protection against its allies. The rest of the world is likely to retaliate, although we have argued that strategic thinking and basic economics call for avoiding excessive retaliation, which in turn could help avoid a global trade war.
History will be made during the Trump-Kim summit on June 12, regardless of the outcome, just because it is taking place. The US has been trying to get agreements and commitments on a number of key issues in advance, with the summit providing the final seal of approval. In contrast, North Korea sees the summit as the first step for negotiations. It is very hard to know what will happen, but it could have profound global implications.
The UK Parliament will vote on the EU withdrawal bill on June 12. This bill copies all existing EU legislation into UK law, ahead of actual Brexit. Theresa May will have to overturn a number of Lords amendments leading to a soft Brexit. The most difficult include the role of the Parliament to approve the final Brexit deal and the UK participation in the EU customs union after Brexit. We have argued that the latter is the best option for the UK for now, as there is no time for new trade deals with third countries. The Lords have asked for the UK to remain in a customs union with the EU and this has also been the Labour’s position. However, this has been a red line for the hard Brexiteers. Theresa May has been trying to find solutions around it, which have been rejected so far by both her own party and the EU. She may not have the votes next week to overturn the Lords’ amendment on this, which will be a defeat, increasing political uncertainty.
The EM View – Political dysfunction. USD strength remains in the driving seat, fueled by a recovery in US economic data surprises and 2yr US real yields hitting fresh high of 70bps (the highest level since September 2009). However, this does not explain the broader discrimination and divergence among EM currencies, even within the Latam FX complex. The key differentiator here is the complex interaction of domestic and global political tensions. BRL is the latest Latam currency to see an intensification of selling pressure against USD (down -14.2% in spot terms this quarter). This comes amid looming elections in October and worsening economic prospects.
By contrast, the selling pressure on the Argentine peso appears to be ebbing with an IMF agreement due to be announced next week. We believe that this should steady the market nerves and provides an opportunity to enter long ARS tactically and take advantage of the carry.
Elections are also a theme in Turkey, where they will be held on June 24th. We remain cautious on TRY, but recognize that the recent 450bps hikes in policy rates to 16.5% are sustaining real interest rates that are consistent with TRY stabilization. The issue is that the market still has to grapple with inflation heading higher and the prospect of fiscal consolidation after the elections.