Week Ahead – A bumper start to the week

Big events keep coming

It could be an interesting start to the week depending on who wins the second round of elections in France on Sunday. Marine Le Pen has made significant progress over the last five years and the race for the Presidency is expected to be much closer this time as a result. Emmanuel Macron saw his lead widen in the polls over the last week but as we’ve seen so often in recent years, they often can’t be relied upon.

If that proves to be the case this time around, the markets could be in for a nasty shock on the open next week; at least initially. A Le Pen victory has been assumed to be a negative for equities and the euro, and if there has been some complacency setting in this week as Macron’s lead has been extended, that could cause quite a stir at the start of trading.

The blackout period means there’ll be no commentary from the Federal Reserve next week. Earnings season is well underway though and there’s plenty of economic data to help fill the void. There’ll also be a number of central bank interest rate decisions, including the Bank of Japan, which has spent recent weeks stopping yields from rising above the upper bound of its Yield Curve Control (YCC) target.

Can Le Pen pull off a shock victory?

CBR to cut rates again?

Will the BoJ keep defending its YCC policy?

US

The pre-FOMC communications blackout starts this weekend, likely to the relief of equity markets. With no Fed speakers yelling 0.50% and 0.75% rate hikes from the rooftops, there is an opportunity for equity markets to stage relief rallies in the week ahead, as well as for the US Dollar to retrace some of its recent gains. 

The data calendar is fairly thin at the start of the week, with just durable goods on Monday, and pending home sales Wednesday. The latter could weigh on markets if a weak print spurs US slowdown fears. Thursday GDP could be a non-event ahead of Friday’s personal income and spending and PCE data. Closely watched by the Fed, high prints could lock and load multiple 0.50% hikes and potential weigh on equities. 

EU 

The second round of the French presidential election takes place on Sunday and Emmanuel Macron is the favourite to win the run-off. His lead in the polls has lengthened over the last week with Marine Le Pen failing to make up ground in the live TV debate. Still, if we’ve learned anything in recent years it’s that voting can surprise us. Especially when there’s a populist option on the ticket. Markets are fairly calm which could result in quite a knee-jerk response on the open next week if Le Pen can pull off an unlikely victory. 

The war in Ukraine continues to be a key driver in the markets, with the EU now considering a ban on imports of Russian oil. This is likely to be phased in over time though which could limit the shock in the markets.

There’s a lot of data from Europe over the next week including GDP, unemployment and surveys but inflation is undoubtedly the headline. The releases from euro area countries earlier in the week should tell us whether we’re in for a surprise when the eurozone flash inflation data is released on Friday. With pressure ramping up on the ECB to join the tightening club this year, the data could make for uncomfortable reading. 

UK

A quiet week for the UK with only tier three economic data being released.

Russia

The CBR meeting on Friday could see the Key Rate cut again after hints this week. The central bank lowered the rate to 17% from 20% at an inter-meeting decision a couple of weeks ago, having sharply increased it in the aftermath of the sanctions from the West in order to stabilise the currency which was in freefall. Inflation has lept to 17.62% but Governor Elvira Nabiullina suggested it could be lowered again next week during her reappointment proceedings on Thursday. 

Unemployment data on Wednesday is expected to confirm it rose to 4.5% in April, up from 4.1% a month earlier. 

South Africa

PPI inflation data is eyed next week after CPI in March rose to the upper end of the SARBs target range (3-6%) at 5.9%. Inflation is continuing to build which means further rate hikes are likely in store. 

Turkey

Mostly tier two and three data next week with the quarterly inflation report on Thursday the most notable release. That said, it may not offer much insight into the roadmap for monetary policy from the CBRT given its disregard for inflation and the markets. For that, we’ll have to wait for the monetary policy review to be published. 

China

Chinese markets remain under heavy pressure on fears of slowing growth, Covid-zero, the Shanghai lockdown, and US delisting uncertainty. The PBOC had refrained from cutting the MLF or LPR rates. Meanwhile, USD/CNH and USD/CNY exploded through 1-year resistance lines. The PBOC appears to be letting the currency weaken rather than go all out on stimulus domestically. If US yields rise next week, downward pressure on the currency and equities could intensify, prompting more offshore outflows.

Data is light until Friday with the release of Caixin manufacturing PMI. They then release the official manufacturing and services PMIs over the weekend. All have downside risks and a potentially negative impact on local equities.

India

The INR and Sensex have been resilient in the past week; perhaps benefitting from investor inflows leaving China as in times past. That could continue in the week ahead with Chinese markets looking to remain weak. An RBI slowly moving towards tightening is supportive of the currency.

It is a light data week with holidays at the week’s end.

Australia 

Australia is on holiday Monday. Wednesday’s Inflation data has upside risks and could squeeze the RBA’s dovish positioning and be supportive of AUD, but negative for local equities.

AUD/USD has broken two-month technical support as sentiment internationally sours on higher US yields and the worsening outlook for China. 

New Zealand

New Zealand is closed on Monday. The New Zealand dollar has broken multi-month support and has traded lower since, finishing the week more than 2% down. Soaring mortgage rates, a softening property market and a Reserve Bank far behind the inflation curve are all weighing on New Zealand markets. 

Japan

Japan is on holiday Friday ahead of the Golden Week holidays in the week following. Attention remains entirely focused on the US/Japan rate differential which has pushed USD/JPY to near 130.00 during the week. The Bank of Japan has conducted extensive operations to cap 10-year JGB yields at 0.25%.

A rise through 130.00 could follow, especially as the Bank of Japan on Thursday, will remain in its current 25-year ultra-dovish stance. Expect the MOF/BOJ rhetoric about the currency to ramp up if 130.00 breaks. That leaves USD/JPY vulnerable to aggressive short-term pullbacks in the weeks ahead.

Japan equities are chasing the Nasdaq up and down but overall the picture remains challenging. A lower yen is not supporting exporters and concerns over soaring energy bills, rising US rates and a Chinese slowdown will be a risk to equity rallies. Japanese retail sales and industrial production on Thursday ahead of the BOJ, have significant downside risks.

Singapore

Rather surprisingly, SGD has weakened significantly after the MAS tightened policy. Both SGD and local equities are catching a cold from a weaker yuan and Mainland Chinese equities. Unemployment on Thursday will have no significant impact, sitting at record lows of 2.40%.

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