EUR 22.10 For Business Accounts Only

The Weekly Track summer-heat

- The Weekly Track – Summer Heat by Bob Savage
http://track.com/articles/the-weekly-track-summer-heat/

The last week was a return to summer markets with focus on a rebound in emerging markets, a sharply weaker USD, and ongoing fears that policy shifts from Europe will be faster than the ECB suggests. The markets reflected an oppressive heat wave that has hung over the US and much of the Northern Hemisphere since June. Mario Draghi was unable to convince the market that he has time to wait for inflation. Many see the ECB taper talk through the lens of the FOMC May 2013 taper tantrums. The rally up in the EUR this last week is one signal, as financial conditions tighten, the relative holding of Bunds over 0.50% 10Y yields is another. Markets are watching to see if a global rate tightening risk in the Autumn derails risk – but for now – that has been pushed aside for the summer carry trade. The issue will continue to hang over European reform and with the honeymoon for Macron already over – as he battles his military. The Italian NPL issue is another angle even with
the bailouts from June. There are other nations in Europe that have banking issues – 6 nations have double digit Non-Performing loans adding up to 9% of Eurozone GDP. The banking union rests on the present EU recovery being strong enough to grow away these troubles. So, the balancing act for the ECB and for the FOMC next week is about confidence. Making sure growth is sufficient to buy time and help cure all ills. The summer heat that has plagued markets with fears of bubbles in real estate, equities and bonds may be abating a bit next week as the FOMC holds steady and markets grind into the last week of the month with a less robust rebalancing trade. For many, the measure of speed of change and mood for these risks is the EUR/USD. The fast jump from 1.10 to over 1.15 has many talking about 1.30-1.35 again but this seems excessive. This mood swing could be tempered like the weather – as the wait for the Autumn and month-end flows moderate buying fears into the 1.1
720-50 resistance. Expect the markets to also remain focused on oil as the OPEC Russia meeting didn’t seem to solve the persistent immediate problem of US production matching OPEC cuts. The geopolitical issues that continue to nag the markets are also likely to continue with the Iran/Iraq weekend deal unlikely to sit well with the US but with Trump facing a big week of testimony as his son, son-in-law and former campaign manager all testify to the Senate. The USD weakness from weaker US data, ongoing political doubts and fear of the FOMC are still at play into the week ahead.