Geopolitical tensions continue to grapple markets

Good Morning,

Geopolitical tensions continue to grapple markets and dominated most of the activity and direction last week. Investor sentiment remained subdued on the back of the danger of further escalation in the Gaza Strip and Ukraine while the EU and America considered sanctions. Markets can now focus on a data laden calendar which might give scope for a bout of positive impetus. In the Eurozone, attention will be focused on the Eurostat's flash estimate of July's EMU-wide consumer price inflation whilst the publication of Q214 GDP and the July payrolls report and ISM purchasing managers index are all numbers which will be closely followed by many.

In the Eurozone, economic sentiment is likely to remain stable in July. While services confidence should register a solid gain, compensating for the drop in consumer sentiment, industrial sentiment should remain unchanged from the month earlier, which is in line with the latest PMI figures. The latest economic indicators confirm that the recovery in the Eurozone is on track, but activity is likely to remain weak and fragile, as indicated by the growth differential between Eurozone’s two largest economies.

Activity was somewhat muted last week in the US. Although inflation figures were in line with expectations, they revealed a slowdown in the underlying price momentum, suggesting an absence of real inflationary pressures despite prices being much stronger than expected in April and May. Secondly, after the sharp contraction of June housing starts last week, the housing market statistics have sent out mixed signals with stronger existing home sales on one hand and a significant drop in new home sales in June on the other hand.

On the data front, the US is expected to take centre stage this week with the publication of three major market movers: the FOMC meeting, employment figures and the first estimate of GDP figures for Q2. The FOMC’s description of the economic environment could be slightly altered to reflect the stronger employment market in the last two months. However, outlook and forward guidance will probably remain unchanged. On Wednesday, the FOMC will conclude its two-day meeting. The accompanying statement is likely to include changes that acknowledge improved US growth, as well as a confirmation of the direction and shape future additional tapering could take. Meanwhile, Friday’s focus will be on the US July employment and manufacturing ISM reports, with analysts expects an increase in non-farm payrolls of 240K and a decline in the unemployment rate to 6.0%.

Elsewhere, in Japan, indications so far suggest that the consumption tax is likely to temporary impact on growth. The focus here is inflation which continues to decline at an alarming rate. In China, Q2 GDP growth accelerated to 7.5% y-o-y, on the back of steady net exports – credit growth remained strong whilst property investment, despite its downward trend, declined its rate of slowdown.

Interestingly, as a result of the recent increase in global political instability, many major central banks have increased their gold reserves. According to an IMF survey, Russia increased its reserves by 1.5% whilst countries such Mexico, Serbia, Greece, Turkey and Ecuador have also followed suit. While low interest rates in US and EU are stimulating demand for high-risk assets, the political crisis is also serving as an opportunity for politicians and key government officials to increase their respective economic cushion by building a buffer in the form of increased gold reserves.

Have a nice day!

Mark