Asian stocks started the week in negative territory and the dollar traded higher as investors continued to monitor the escalating U.S. trade war with China. President Trump threatened last week that he’s ready to impose tariffs on $267 billion in Chinese goods on top of the proposed $200 billion that may come into effect soon. The total sum would then cover all U.S. imported goods from China, which is definitely not yet priced in the financial markets.
U.S. equity investors who have ignored the selloff in emerging market assets over the past couple of months started looking a bit shaky last week. The S&P 500 ended last week 1% lower, while the NASDAQ composite declined 2.55%. It’s unclear yet whether the contagion effect has started spreading into U.S. assets, but if signs of stress begin to show in U.S. equities, expect to see further steep selloffs in global equity markets. It requires remarkable positive news to sway investors from the ongoing EM troubles and escalating trade tensions - and so far, there isn’t any.
The dollar has become the destination for safe-haven flows amid the escalation of trade tensions, but also supporting the greenback was the recent batch of economic data. The latest ISM data showed manufacturing and service sectors activity grew faster than most optimistic economists’ predictions. Job growth remains robust, but more importantly, wage growth hit a nine-year high in August. The upcoming data this week may also show solid performance for retail sales and consumer inflation. This should further boost expectations for two more rate hikes in 2018, leading to further divergence in monetary policies.
Investors this week will also focus on monetary policy decisions, particularly emerging markets central banks which are aiming to put an end to their currency turmoil. The Turkish central bank will be -front and center on Thursday after policymakers vowed to step in to contain inflationary pressures. I think a rate hike is imminent, but it’s the magnitude of the rate hike that matters now. The central bank needs to push rates to more than 600 basis points to restore investors’ confidence and bring real interest rates into positive territory. Any disappointment here will likely lead to a continued selloff in the Turkish Lira.
The European Central Bank and Bank of England will also be meeting on Thursday, but do not expect a lot of excitement here. ECB President Draghi will likely give reassurance that the ECB bond buying stimulus program will be ending by year’s end. Meanwhile, investors would like to know what the BoE’s views are on the latest Brexit talks. However, both central banks will stand pat on rates.
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