The platform that lays out the divergence in monetary policy of the Fed and ECB

Macro Outlook

Despite Mario Draghi apparently trying to downplay the immediate need for the ECB to engage quantitative easing, the markets are taking a different view of what is required. Last week we saw investors continuing to buy German Bunds. In fact they are chasing the Bund to the extent at which buying a 10 year German government bond will yield the investor less than 1.0%. Buying the 2 year bond actually yields minus 0.02%. With Germany falling back into contraction territory in Q2 and being the supposed growth driver of the Eurozone, this gives the ECB a problem. With Italy and France also moving back into contraction in Q2 and disinflation showing that prices are sliding ever closer to deflation, the voices crying out for the ECB to use its ultimate weapon are mounting. The German Bund is not the only sovereign bond that is in demand as French, Spanish and Italian yields spike to record lows. Bond markets are sending a signal to the ECB that they are increasingly pricing in deflation in the Eurozone and the policy response of full-blown QE. The emphasis will grow on this week’s flash PMI data which could show that Q3 is struggling to muster growth too. If the Eurozone economic recovery is over and recession is on the horizon, then the ECB will have to use QE. It is just a matter of when.

Must watch out for: Janet Yellen speaking at the Jackson Hole symposium

Impact: Anticipation is high ahead of the annual Jackson Hole symposium, which includes speeches by central bank chiefs of the Fed and ECB. Ben Bernanke used speeches in 2010 and 2012 to signal major shifts in Federal Reserve policy, but it is unlikely that a dovish Janet Yellen will rock the boat. The Fed is still interested to see wage growth (which remains negligible) before making a hawkish move. This will not stop markets hanging on Yellen’s every word, so expect high volatility. Oh, and Mario Draghi speaks at 19:30BST.

Foreign Exchange

Dollar strength which has been such feature of recent weeks has moved into a consolidation phase in recent days. This has not necessarily been because forex markets are flat, it is just that there have been conflicting reactions to the pairs. Despite the disappointingly weak Eurozone GDP data and the fluctuating geopolitical tensions, the euro has remained supported in recent days. There were plenty of reasons to sell the euro last week, one of which being the Eurozone drifting ever closer towards the requirement for QE, but it has not been sold. This bodes well for a near term recovery. As for Cable, sterling has been slammed as a dovish Quarterly Inflation Report from the Bank of England has meant that banks and traders alike have been required to push back their expectations of the Bank of England being the first major central bank to hike interest rates. If you add I the gains on Dollar/Yen as the safe haven trade has diminished, this all makes for a mixed outlook for the dollar against major currencies. A consolidation in the Dollar Index is reflecting this.

WATCH FOR: Aside from a potential safe-haven impact from geopolitics there are some huge economic releases to drive forex. Inflation for both UK and US will drive early week moves on Cable, whilst the meeting minutes from the Bank of England and the Fed will also impact. Euro traders will be looking out for flash PMI data. Janet Yellen and Mario Draghi late on Friday could mean a volatile end to the week.

Indices

Volatility may have fallen recently but still remains elevated. With low traded volumes, fluctuating geopolitical tensions, especially in Ukraine have played havoc with European indices. The German DAX Xetra and French CAC have been significantly hit. Despite just 3% of German exports going to Russia directly, the Eurozone economies are closely linked and signs are that sanctions to and from Russia are having an impact across the continent. This has resulted in significant volatility throughout August for the DAX and CAC. However, the elastic is snapping back and the sharp downside is being retraced as elevated geopolitical tensions have begun to calm down. Whether this is the beginning of the end remains to be seen, but indices remain incredibly sensitive to tensions as Friday’s reaction to Ukraine attacking a Russian military convoy shows. Moving forward though, it could be the carrot of ECB quantitative easing that persuades investors that Eurozone equity markets represent significant value at these levels. This could be the next big move. Mario Draghi has the opportunity to lay out plans for the concept of full blown QE in his speech at Jackson Hole should he choose to use it.

WATCH FOR: Tensions with Russia continue to dominate risk appetite. Earnings season is petering out so focus could turn back to the Fed with FOMC meeting minutes and Yellen’s Jackson Hole speech. Flash PMI data form China and the Eurozone will also be a key driver for risk this week.

Other Assets: Commodities & Bonds

A consolidation in the prices of precious metals in the past week has finally been broken, to the downside. An initial lack of direction was driven firstly a consolidation in the US dollar. However with a reduction in the “war premium” arising from the dovish shift in the actions and rhetoric of Russian President Putin in the past few days, the break back lower has finally been seen. With gold breaching $1300 there could be a test of $1280 and silver is just continuing its correction back towards $18.60. The oil price continues to fall on a glut of supply and a lack of demand, with sluggish economic data from the Eurozone, falling demand in China and a seasonal issues in the US.

The disappointing Eurozone GDP data and confirmed slide in inflation to 0.4% has continued to drive investors into Eurozone sovereign debt. Yields continue to plumb new depths with the German 10 year Bund falling below 1% for the first time ever this week and the German 2 year Schatz actually dropping in negative territory.

WATCH FOR: Fed meeting minutes and Yellen’s Jackson Hole speech could drive the dollar this week and give a negative steer to commodities. Weak Eurozone flash PMIs could drive investors further into bonds.