Good morning,
Sharwood, the Gordon Setter with a knack for napping, has just wrapped up his 40th and final blood donation for Pet Blood UK. Known for his relaxed approach—literally, he falls asleep and snores through the process—Sharwood has helped save 160 canine lives. Now retired, this champion of charity was honoured with a gold medal and a stash of doggy treats.
Last Week
Global stock markets experienced a dramatic downturn on Monday, signalling a sharp shift in investor sentiment as fears of a US recession took centre stage. The Japanese Topix index led the rout, plunging 12.2% in its worst day since 1987, wiping out all its gains for the year. Wall Street wasn’t spared either, with the Nasdaq down 6.3% and the S&P 500 falling 4.1%, as major tech stocks like Nvidia, Apple, and Tesla suffered significant losses. The spike in the Vix index to over 65 points underscored the growing anxiety, marking a sudden end to the market’s bullish streak. The focus now turns to the Federal Reserve, with markets anticipating potential emergency rate cuts as signs of economic fragility spread globally.
By Tuesday, investors began reassessing whether the sharp sell-off had been an overreaction. In response, several Federal Reserve officials, including Chicago Fed President Austan Goolsbee, sought to calm markets, signalling readiness to address any economic downturn. By Wednesday, Asian equities led a recovery, buoyed by a rebound in regional chip stocks and a sliding yen, with Japan’s Topix index rising 3.3%. The market rally gained further momentum on Thursday as lower-than-expected US unemployment claims eased fears of an imminent recession. By Friday, most global stock markets had nearly regained their earlier losses, and the Vix index settled just above where it started the week, reflecting a cautious return to stability.
FX markets were caught in the crossfire of last week’s volatility, with the usual ‘risk-off’ scenario playing out differently than expected. Traditionally, the dollar benefits from market turbulence, but the unwinding of the USD/JPY carry trade saw significant capital flow out of the dollar and into safer currencies like the yen, Swiss franc, and euro. The euro emerged as the biggest winner, testing yearly highs against the dollar on Monday before cooling slightly. It also posted a remarkable 2% gain against sterling over four days, its strongest streak in over three years, closing the week at a four-month high. The hawkish stance in Japan contrasted sharply with dovish expectations for US monetary policy, further driving these shifts.
This Week
With last week’s volatility still fresh in mind, markets are poised to closely monitor the health of the US economy in the coming weeks. Concerns over a potential recession have eased somewhat, but investors remain on edge, particularly after the unexpected market reaction to last week’s unemployment claims. This week, attention will turn to key data releases, including the CPI report, which is expected to show a continued downward trend in inflation. While a stable CPI reading may not fully calm slowdown fears, any surprises—upward or downward—could have significant market implications. Investors are particularly wary that a higher-than-expected inflation print could delay the Fed’s ability to cut rates, adding to the economy’s challenges.
The pound is on the backfoot, giving up nearly all its July gains and underperforming all major currencies this month, except for the dollar. While the Bank of England’s recent rate cut has contributed to sterling’s weakness, unrest in English cities has added further pressure, occurring just as political risks were largely priced out. This week, the focus shifts to the UK economy, with key data releases starting with Tuesday’s labour market report. A cooling labour market has moderated wage growth to 5.7% y/y, but BoE policymakers may need to see further declines before considering another rate cut. Wednesday’s CPI figures will be pivotal in shaping expectations for the BoE’s September meeting, while Thursday’s Q2 GDP readings and Friday’s retail sales data could further influence market sentiment, potentially adding to the pound’s struggles.
Key events
Tuesday August 13th
02:30 Australian Dollar Wage Price Index
07:00 GBP Claimant Count Change
13:30 US PPI
Wednesday August 14th
03:00 New Zealand Cash Rate
07:00 GBP CPI
13:30 US Core CPI
Thursday August 15th
02:30 Australian Dollar Unemployment Rate
07:00 UK GDP
13:30 US Retail Sales
13:30 US Unemployment Claims
Friday August 16th
00:30 RBA Chief Bullock Speaks
07:00 GBP Retail Sales
Have a great week,
The Garton Team.