Week Ahead: Sino-US tech war heats up

US

Further evidence could show that coronavirus is getting under control in the US.  New cases and hospitalizations have been declining, however testing slowed down drastically in the east coast due to Hurricane Isaias.  On Wednesday, inflation data is expected to come back down to earth.  Headline inflation should drop from 0.6% to 0.3%, erasing much of last month’s biggest gain in eight years.  Core inflation is expected to remain steady 0.2%. The US economy should still expect depressed price levels until the country has the virus under control.  

The main event of the week is US retail sales, which could show the American shopper remains strong despite so many issues in the economy.  Retail sales has steadily increased over the past two months and that should continue albeit at a slower pace.  The July advance retail sales monthly reading is expected to increase 1.7%, which would be down from the 7.5% seen in June and the 18.2% rise in May.  

US Politics

Lawmakers have botched the latest COVID-19 relief bill and it seems President Trump might need to use his executive powers to provide some immediate aid.

Former-VP Biden will make his decision on his running mate.  Biden has signaled four African American women and Senator Elizabeth Warren are under consideration as his running mate.  Biden will turn 78 a few weeks after the election, so his VP selection will be critical for many voters.  

Mexico 

Mexico’s central bank should deliver a rate cut despite a temporary pickup with inflation.  The Banxico still has room for a few more rate cuts before the year is over and right now the economy needs it.  Mexico is still battling the coronavirus and fears are high the number of cases and the death toll are undercounted. Mexico’s economy is slowing recovering and easing lockdown measures is nowhere near being justified.  

EU

Much like everywhere else, the EU is seeing some surges in Covid cases but broadly speaking the second waves have been fairly limited. Not enough to stop the UK adding Belgium, among others to their quarantine list which also includes Spain, much to Madrid’s annoyance. The PMIs this week were encouraging, particularly on the manufacturing side. Next week is looking a little light on the data side.

UK

The UK will see next week just how hard a hit the economy took in the second quarter, with the average forecast coming in around a 20% contraction, much more severe than many of its peers. On a more positive note, the Bank of England sees the UK bouncing back faster that it previously anticipated, with the economy shrinking only 9.5% this year compared with 14% previously. Unemployment is also expected to stabilize around 7.5% which is far below what was previously the consensus forecast. The downside here is that the rebound after this year is expected to be weaker so a mixed news week for the UK.

Turkey

The lira fell around 7% in a few days against the dollar before paring losses on Friday. Turkey has long had a variety of problems that make investors nervous and they have very much come to the fore, culminating in soaring borrowing costs earlier this week. The lira has fallen to a record low and is now looking very vulnerable. This is a currency that has already had restrictions imposed in recent months and a country that has been burning through reserves to support it. With the central bank reluctant to hike rates and a leader that believes doing so stokes inflation – contrary to popular belief – and a record for sacking central bank heads that disagree, it’s hard to see where the country turns next to step further declines. 

China

Geopolitics will be the centre of attention with the US banning US companies from dealing with ByteDance and Tencent. Proposing banning Chinese listing in US for non-compliance with US accounting standards. The extent of China retaliation could adversely impact equity markets internationally and the CNY/CNH.

Industrial Production next Friday week’s data highlight.

Hong Kong

Covid-19 spread increases restrictions in Hong Kong. Hong Kong CEO postpones election one year due to Covid-19. Hong Kong equities lower, especially Tencent, after US bans today. Weekend retaliation from China could see Asian stock sold heavily on Monday.

India

Covid-19 cases continue skyrocketing. India is now in top four for infections. INR remains under pressure as stress on the government budget and banking sector continue. A weaker US Dollar appears merely a stay of execution.  Very real possibility that India will repeat Indonesia’s recent playbook, and get the central bank to directly purchase new government bond issues. Negative for currency and stocks.

Highest risk economy in Asia from an economic and Covid-19 perspective.

Australia

Australian Dollar grinds higher but momentum slows as domestic issues weigh heavily.

Restrictions increased in Melbourne as Covid-19 cases jumped to 700+ a day. Borders closed with NSW and Queensland. Community infections increase in Sydney. The return of movement restrictions in Sydney a potential negative game-changer.

RBA rate unchanged but uber-dovish guidance. AUD has not rallied high enough to bring comments yet. No market moving data this week.

Japan

USD/JPYhas recovery reduces selling pressure on Japan equities. Strong retaliation by China against US companies will see Japan equities under pressure from Tuesday, as Monday is a holiday.

Covid-19 cases continue spiking higher in Tokyo. Local government is close to finally declaring a state of emergency. Negative for Japan equities and Yen.

No significant data.

Markets

Oil

Oil’s midweek breakout was no gamechanger but it continues to trade towards the upper end of its two month range. The rally carried little momentum, further suggesting we’re at the latter end of an exhausted move but that, in itself, doesn’t mean we’re going to see a broad correction. It may just mean traders aren’t ready to jump fully back on the crude train yet, with Covid setbacks happening every week around the globe, the outlook remains uncertain. There’s a long and bumpy road ahead for the global recovery, we’ll have to learn to be extremely patient.

Gold

Gold could be the one to watch today as efforts to determine its risk role continue. Today we’re seeing some risk aversion ahead of the jobs report and the dollar is once again being favoured, seeing gold pulling off its highs. As it stands, it’s still looking pretty healthy though and it may take a pretty horrible report to test $2,000 again. It’s come a long way. 

There are a growing list of risk factors in these markets which should keep things interesting for weeks to come. US Covid cases and deaths are showing slight improvements this week, albeit from high levels, but we’ll need a lot more improving data to calm the nerves. Geopolitics isn’t improving any time soon so gold will remain volatile.