In our fifth installment of the Investment Bank Outlook 26-08-19, we're going to bring you a selection of perspectives from leading investment banks to outline the key issues and directional views for the week ahead. These excerpts, taken from research notes, will cover issues such as key market themes, economic releases, as well as any major trends and levels to watch. Please note, this material, which does not reflect the opinions of Tickmill, is provided for educational purposes only and should not be taken as an investment recommendation.
Danske Bank
Fed hawks did their best talking up US rates and the USD last week, but it all turned around Friday after Fed chair Powell’s 'Jackson Hole' speech and the escalation of the trade war. USD rates and USD/JPY are now trading close to mid-August lows and even EUR/USD bounced on the news, despite the pair being less receptive to trade and/or US monetary policy news lately. Developments on Friday mean that the markets will be on their toes this week before key US data releases (ISM and NFP) next week. We stress that we still see potential for USD/JPY to undershoot our 3M forecast of 1.05.
In Scandi FX, the NOK especially suffered from the further ‘tit-for-tat’ trade war escalation on Friday, as risk assets came under pressure, returning EUR/NOK to the 10.00 level. This illustrates the important point that domestic releases are far less important in driving the NOK now, relative to the global risk environment. We expect this to also be the case this week. That said, this week will finish off with a range of important Norwegian numbers (GDP, retails sales, NAV) which, however, are more likely to drive front-end NOK rates. Our expectation is that the numbers will come out to on the strong side of the markets’ expectations and hence increase market expectations of a September rate hike from Norges Bank. All else equal, this should drive a stronger NOK, but we emphasize the global environment is far more important at this stage.
Nomura
Durable goods orders (Monday): Excluding volatile transportation goods, durable goods orders likely fell 0.5% m-o-m in July after a strong 1.0% increase in June. Our forecasts are based on recent moderation in new orders indices in several manufacturing surveys. For example, the ISM manufacturing new orders index, at 50.8 in July, was only slightly above the breakeven point of 50, after remaining elevated earlier in 2019. In addition, industrial production of durable goods excluding transportation equipment fell sharply by 0.5% m-o-m in July after remaining flat in June. These data all point to a soft reading for ex-transportation durable goods orders, which would be consistent with our view that softening of momentum in recent months has been mostly contained in the industrial sector (see: Data Suggest Downdrafts Remain Concentrated in the Industrial Sector, 15 August 2019). We expect continued weakness in non-defense aircraft orders and only a modest increase in orders for motor vehicles. Together with transportation goods orders, we expect a 0.6% m-o-m decline in aggregate durable goods orders.
Case-Shiller home price index (Tuesday): The market for existing homes remained soft in June despite some boost from lower mortgage rates as consumers remain wary of high home prices. Healthy labor market conditions and income growth remain favorable for demand but affordability may need to improve before we see a meaningful recovery in existing home sales. As a result, we expect continued easing of the Case-Shiller 20-city composite home price index in June.
Consumer confidence (Tuesday): For Conference Board’s consumer confidence index, we forecast a 4.4pp decline to 131.3 in August. In the preliminary August University of Michigan survey, consumer sentiment declined relatively sharply, weighed down by increased concerns over US tariffs. However, this survey was conducted before President Trump delayed higher tariffs for over half of the originally targeted $300bn in Chinese imports, including many consumer goods, until December. Thus, consumer confidence in the Conference Board’s survey, conducted over the full month of August, may decline less than what the University of Michigan numbers would imply.
Initial jobless claims (Thursday): Layoff activity in the US labor market remains muted despite elevated trade tensions and slowing growth. As a result, we expect initial jobless claims to remain subdued over the near term.
Morgan Stanley
JPY may rally most… We expect JPY, CHF, EUR and USD to benefit from declining global trade volumes, smaller cross-border asset and funding flows and higher volatility for risk assets. Japan has been the globe’s biggest foreign asset holder in recent years. Japan-based investors have shifted holdings increasingly into higher-risk asset classes to maintain returns despite falling bond yields. In addition, Japan-based banks (facing declining local returns) have swapped JPY into other currencies (mainly USD), using these funds to buy non-JPY hard currency assets or provide non-JPY hard currency loans. These banks have shifted in this way because non-JPY assets offered a higher return. As global yield curves have inverted, this business model is under pressure. Slowing global trade and economic growth have reduced demand for non-JPY assets, while also increasing their risk profile. Hence, Japanese banks may retreat from this business.
…due to Japan’s substantial repatriation potential… Japan has the world's greatest potential for asset repatriation due to two factors. First, Japan-based asset managers face the challenge of higher asset volatility (raising their value-at risk metrics above acceptable levels), which may lead these investors to reduce foreign asset exposure. JPY-funded investors may repay JPY loans early to Japanese banks, which may also reduce their foreign asset holdings due to a deterioration in the risk/reward profile of foreign exposures.
Please note that this material is provided for informational purposes only and should not be considered as investment advice. The views discussed in the above video are those of our analysts and are not shared by Tickmill. Trading in the financial markets is very risky.
Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
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