The US dollar is narrowly mixed as we head into the weekend. Global stock markets are also mixed. Although the Nikkei was down, Chinese equities eked out a small gain. The Shanghai Composite gained nearly 6% this week, the best in nearly two months. European bourses are mostly higher today, which only pares the week’s declines.
Investors should know five things before the weekend.
Indian Prime Minister Narendra Modi’s recent meeting with Pakistan’s Prime Minister Nawaz Sharif on the sidelines of the Shanghai Cooperation Organisation (SCO) summit in Russia, and his visit to Pakistan next year for the SAARC summit, has raised hopes about the possibility of resumption of the bilateral composite dialogue.
In further signs of an improving U.S. economy, both important unemployment claim statistics have fallen to their lowest level in nearly a generation and retail sales have shown a sharp increase.
Weekly initial unemployment claims rose to 274,000 in the week ending August 8, an increase of 1.9% from the previous week. However, the previous week’s level was revised by 1,000 to 269,000, and the 4-week moving average, which economists primarily use to see if a major trend is emerging in unemployment claims, fell by 1,750 from the previous week’s revised average.
The euro has rallied to new highs since mid-July, and after repeated attempts to convincingly break above JPY125, the dollar is retreating against the yen as well. The euro reached almost $1.1160. The next target is near $1.1200. The dollar is posting a potential key reversal against the yen by making a new high for the move before selling off through yesterday’s low. This bearish price action needs confirmation by a close below yesterday’s lows seen just above JPY124.50. Support is near JPY124.
As the Trans-Pacific Partnership (TPP) goes through another round, some details have started trickling out from the secretive negotiations. A concerning detail for Australia is the provision that applies penalties to foreign state-owned enterprises (SOEs) if they receive discounted loans when investing in TPP member economies.
The idea of ‘competitive neutrality’ is the basis for these provisions. This clause aims to stop SOEs from receiving an advantage over their private competitors by virtue of their connection to their home state.
Black Forest ham, Asiago, Gorgonzola, Gouda, and many other European geographical indications for foodstuffs are at the centre of a TTIP food fight. They are all protected from imitation by other companies in many countries of the world. Not in the US though. And as the details of the Transatlantic Trade and Investment Partnership are negotiated, the EU wants to stop American manufacturers from being able to falsely label their products with their protected names.
On 11 June 2015, Zhou Yongkang was found guilty of corruption, among other things, and sentenced to life imprisonment. He appeared before a national broadcast to listen to his guilty verdict, express his responsibility in doing harm to the country and relinquish his right to appeal.
US exports of goods and services to China have been practically flat since the first quarter of 2014, while Chinese exports to the United States have expanded only modestly. This is not an inspiring record. Meanwhile, two-way stocks of direct investment remain well below potential — about US$60 billion from the United States to China and around US$50 billion going the other direction. This stands in contrast with a potential of at least US$100 billion in each direction.
The US dollar was unable to sustain its pre-weekend gains despite an employment report generally recognized to be sufficient to keep the Federal Reserve on course to raise rates next month. However, the poor price action has not seen follow through dollar selling. A consolidative tone has emerged as the markets await this week’s developments, especially the US retail sales and UK labor report. The Eurozone reports industrial output and, more importantly, Q2 GDP estimates.
Investors seem to take for granted the easier monetary policy trajectories in the Eurozone and Japan. The debate has been over the timing of the normalization in the US and the UK. Emerging talk recently said that the Bank of England could hike rates before the Fed was never very compelling. Last week’s developments increase the likelihood that the FOMC raises rates at least 5-6 months before the BOE.
