Market sentiment flat overnight eyeing major event risks ahead

Market sentiment flat overnight eyeing major event risks ahead - 3 key event risks on the horizon     

• USD: US election risks now the overarching theme amid stalled phase 4 stimulus talks, US – China tensions - Potential autumn headwinds seem to be getting closer with the stalled phase 4 fiscal stimulus talks and rising US – China tensions now increasingly hostage to US election rhetoric. The Democratic National Convention commences and finishes August 20. Markets will listen closely as the Biden-Harris ticket outlines top Administration priorities that could serve as the first reminder of the potentially risk negative policies from front-runner Biden (higher corporate and individual taxes, increasing rhetoric between Trump and Biden on China).       

• USD: Stalled phase 4 stimulus talks – A key risk for the US economy now lies in the current phase 2/3 related fiscal stimulus starting to fade by mid-September. In the absence of new fiscal stimulus, this would likely hit consumer sentiment. For now, there seems little scope for a phase 4 stimulus breakthrough as the Senate has broken for recess and is not scheduled to be in session until September and it looks as if a deal (if there is to be one), could be postponed even beyond September as domestic political tensions pick up ahead of the US presidential election. Citi analysts do expect Congress to reach a deal ~USD1.5tn in size but note prospects for and timing of a deal have become more uncertain.    

  USD: US – China talks to review phase one trade deal suspended indefinitely - latest reports suggest talks are to be postponed until further notice given logistical headwinds per Reuters News sources. Bottom Line - US-China tensions continue to deteriorate into the US November presidential election with both the Republicans and Democrats ratcheting up their rhetoric on China. The key question is – at what point does it trigger an unraveling of the phase one trade deal, if at all.        

BoE’s Haldane says it’s “now time to see economic glass as half full” – at least for UK       

• GBP: Writing in the Daily Mail over the weekend, BoE Chief Economist Andy Haldane notes ‘the foundations for an economic recovery – a rapid one – are already in place.’ This follows nearly half of workers returning to work last week, up 3pp from the final week in July. Haldane also notes the Bank forecasts UK GDP rising by roughly 20% in H2’20 (Citi 19.5%). Citi analysts still continue to expect a further 10bps cut to the Bank Rate and £50bn added to QE in November.    

Week Ahead – FOMC & RBA minutes, euro zone and UK PMIs, euro zone consumer confidence, UK retail sales, Canada CPI & Singapore exports

• USD: FOMC minutes - The July FOMC meeting minutes on Wednesday will likely be greatly scrutinized for signals regarding plans to strengthen “forward guidance” and conclude their review of the monetary policy framework at this year’s virtual Jackson Hole conference to be held August 27-28. At the Fed’s September meeting, Citi analysts expect the FOMC to commit to tolerate significant inflation overshoots by not raising rates until inflation is sustainably at or above the 2% target.        

• EUR: Euro Manufacturing PMI, Aug Flash Forecast: 54.4, Prior: 51.8; Services PMI, Aug Flash Forecast: 56.8, Prior: 54.7; Composite PMI, Aug Flash Forecast: 57.2, Prior: 54.9 – euro area flash PMIs should post further gains in August with reducing inventory levels and international demand recovering from still-subdued levels pushing manufacturing output higher. But the biggest gain should happen in the services sector with more room to catch up than manufacturing. 

• EUR: Euro area Consumer Confidence, Aug Flash Forecast: -16, Prior: -15 - The resurgence of Covid infections rates and the likely more subdued outlook on the labor market, as the usage of furloughing schemes is reduced, may lead to a second consecutive decline in consumer sentiment in August. The level of consumer confidence had not been affected as much as business sentiment during the lockdowns, but may be slower to recover now.

• GBP: UK Manufacturing PMI, Aug Flash Forecast: 53.6, Prior (Jul Final): 53.3; Services PMI, Aug Flash Forecast: 55.6, Prior (Jul Final): 56.5 - UK manufacturing PMI has improved significantly in July, with an upward shift in the output index partially offset by a relatively weak employment index. This month Citi analysts expect the latter to have improved somewhat – even if still well in negative territory. Services PMI is also likely to have remained strong in August.

• GBP: UK Retail Sales, July Forecast: 1.8% MM, -0.2% YY, Prior: 13.9% MM, -1.6% YY; Ex Auto Fuel, July Forecast: 1.3% MM, 2.6% YY, Prior: 13.5% MM, 1.7% YY – UK retail sales make up just one third of total private expenditure, however seem to be making an outsized contribution to the recovery in household spending. With timelier data suggesting consumer services spending remained roughly 40% below normal levels in July, Citi analysts think retail sales are likely to have benefitted from an ongoing rotation towards consumer durables.

• Commodity Bloc: RBA minutes; Canada CPI NSA MoM (Jul) – Citi: 0.4%, median: 0.4%, prior: 0.8%; CPI YoY – Citi: 0.6%, median: 0.5%, prior: 0.7% - Citi analysts expect another solid 0.4% increase in July though accompanied by higher volatility in headline CPI over the next year. Regarding core CPI however, Citi analysts expect overall downward pressure over the coming months, with the core measures on average remaining below the 2% target.     

• SGD: Singapore Non-oil Domestic Exports (%MoM sa) July: Citi forecast -1.2, Consensus -1.3, Prior 0.5; Non-oil Domestic Exports (%YoY): Citi forecast 2.5, Consensus 4.2, Prior 16.1

This is is an extract from the Daily Currency Update, dated August 18, 2020. Please approach a Citigold Relationship Manager if you would like more information.