Brace for World Economy’s Most Important Week of Year

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  • Trump meets Kim, Putin meets MBS, U.K. MPs vote on Brexit bill
  • Fed to hike, ECB to update bond plan, BOJ to keep stimulating

It’s supposed to be a week when many in Europe are on their to, if not already at, their first summer vacation, while Wall Streeters are enjoying the lovely weather and debating whether to stay in the Hamptons a little bit longer. Well they won’t, because as Bank of America’s FX strategists preview, the coming week “could be the most important week of the year.”

Here’s why: from the next round in the escalating trade war in the post-shocking G7 world which has seen Trump and Trudeau engage in a “low brow” fight, to the historic Trump-Kim summit, to the all important US CPI report (the US economy is now on the verge of overheating), to the UK parliament’s Brexit vote, to no less than three major central bank announcements from the ECB, BOJ and FOMC, of which the latter is expected to delivers its latest rate hike, the 7th of the cycle, while Draghi may announce the end of QE, from continued deterioration in Italian markets and the latest Italian bond auction especially following the latest “deposit flight” Target2 data, to Vladimir Putin meeting with Saudi Crown Prince Mohammed bin Salman at the opening game of the World Cup soccer tournament potentially moving the oil-market, it will be a non-stop bonanza of one market-moving headline to the next.

And speaking of BofA’s preview, this is how the bank describes some of this week’s key catalysts:

In our view, the ECB has decided to announce in June how QE will end for three reasons. The QE program will end for sure this year, because of technical constraints, so there is no reason to keep the uncertainty and give a false impression that extending QE to 2019 remains an option. Following the market turmoil from Italy last week, the ECB has strong incentives to make it clear that QE is about to end, also sending a message to the new government in Italy that they should not count on QE support if they want to loosen fiscal policies. And recent headlines on the ECB drop of BTP purchases in May makes the QE program politically more controversial. This suggests that the end of QE has nothing to do with the intended ECB monetary policy stance or the latest economic developments and outlook ahead. We would therefore expect the ECB to emphasize that rate hikes ahead will be strictly data dependent.

The FOMC hike next week is a done deal in our view and already fully priced by markets. The focus likely will be on the tone. We believe the Fed has to acknowledge the very strong US data this year, but also risks ahead from weaker data abroad and trade protection. We see no reason for the Fed to rock the boat by changing their path for rate hikes ahead. They have plenty of time to revisit the dot plot in September. For now, we believe they should feel comfortable with what markets are pricing for this year.

Trade war risks likely will also dominate headlines next week and are likely to be the main theme for this summer, in our view. Unless we get a surprising last minute deal in the G7 meeting this weekend, the US could be moving towards more trade protection against its allies. The rest of the world is likely to retaliate, although we have argued in a report this week that strategic thinking and basic economics call for avoiding excessive retaliation, which in turn could help avoid a global trade war.

History will be made during the Trump-Kim summit on June 12, regardless of the outcome, just because it is taking place. The US has been trying to get agreements and commitments on a number of key issues in advance, with the summit providing the final seal of approval. In contrast, North Korea sees the summit as the first step for negotiations. It is very hard to know what will happen, but it could have profound global implications.

The UK Parliament will vote on the EU withdrawal bill on June 12. This bill copies all existing EU legislation into UK law, ahead of actual Brexit. Theresa May will have to overturn a number of Lords amendments leading to a soft Brexit. The most difficult include the role of the Parliament to approve the final Brexit deal and the UK participation in the EU customs union after Brexit. We have argued that the latter is the best option for the UK for now, as there is no time for new trade deals with third countries. The Lords have asked for the UK to remain in a customs union with the EU and this has also been the Labour’s position. However, this has been a red line for the hard Brexiteers. Theresa May has been trying to find solutions around it, which have been rejected so far by both her own party and the EU. She may not have the votes next week to overturn the Lords’ amendment on this, which will be a defeat, increasing political uncertainty.

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