US equities are coming off the worst week since the May selloff and while market participants will get a break from Fedspeak as the pre-FOMC blackout kicks in, there are lots of matches just waiting to be struck.
Beltway brawlers
For one thing, Robert Mueller will head up to Capitol Hill to testify before the House Judiciary and Intelligence committees. Mueller’s testimony, which was delayed for a week, is being billed as a make or break moment for the faction of House Democrats angling to oust Trump despite Nancy Pelosi’s reluctance to countenance impeachment proceedings.
During his first and only public statement on the Russia probe, Mueller said any testimony he might give wouldn’t deviate from the report that bears his name. That contention will be put to the test. Among other things, Democrats are likely to ask whether Mueller would have indicted the president were it not for Justice Department regulations and also about William Barr’s actions in the weeks after the report was delivered to the DoJ.
Mueller’s presence before Congress is likely to mean Trump will be on edge all week. That could translate into more shrill rhetoric aimed at Alexandria Ocasio-Cortez, Ilhan Omar, Rashida Tlaib and Ayanna Pressley, who the president lambasted again on Sunday. He clearly believes he’s “winning” the war of words with “The Squad”, and while that might be true (depending on your definition of “winning”), some Republicans aren’t particularly enamored with the prospect of “send her back” becoming the new “lock her up” ahead of 2020.
Additionally, Larry Kudlow will meet with Huawei suppliers at the White House, where the administration will be lobbied to allow US companies to supply China’s corporate crown jewel with the components the company needs to manufacture laptops and phones “even if the White House is intent on continuing to block exports of supplies Huawei uses to manufacture 5G wireless equipment”, the Washington Post reports. Qualcomm, Intel and Google (among others) will speak to Kudlow and other Trump officials. As WaPo goes on to note, “tech companies are also asking the administration to relax the anti-Huawei rules that now bar them from participating alongside the Chinese company in global standards-setting bodies, which establish technical rules that underpin global networks”.
This comes at a critical juncture. The Huawei issue appears to be one of the factors holding up negotiations between the US and China, and lawmakers are now in the process of trying to enshrine Trump’s blacklisting of the company into law.
Read more: As ‘Trade War’ Retains Top Spot On ‘Tail Risk’ List, Congress Calls Trump’s Huawei Bluff
Speaking of US tech firms, this is obviously a big week for earnings, with Facebook, Amazon and Alphabet on deck and investors nervous after the Netflix boondoggle. Boeing reports as well, which will be viewed through the lens of the 737 soap opera.
On the data front in the US, we’ll get advance Q2 GDP and durable goods.
“This week, the market will fully play the waiting game, as there will be no Fed communication [and] US data and politics will likely be the main drivers”, Barclays wrote Sunday. “US politics could generate market-moving headlines this week, as the US administration holds its 45-day review of the US-Mexico immigration deal and could insist that Mexico signs for a safe third country status [under] threat of tariffs again, which would reignite uncertainty on the global trade front”, the bank goes on to write, teasing a potential black swan on the way to noting that “in general, the US administration is likely to want to highlight its policies and goals this week, especially during Mueller’s testimony, which can generate headline risk on the trade and geopolitical fronts”.
Super Mario
Across the pond, the ECB is up to bat, and this is a big one. It’s at least possible they could cut rates, but generally speaking, the more likely scenario is that the statement and Draghi’s remarks will be used to prepare the market for an easing package to be formally unveiled in September.
The economic outlook hasn’t changed much since the June meeting. Draghi’s Sintra comments all but confirmed further accommodation is imminent. The assumption is that Christine Lagarde will carry on Draghi’s legacy. Both the Sintra remarks and the announcement of Lagarde as Draghi’s successor helped stabilize inflation expectations temporarily, but that’s not likely to last in the absence of a forceful follow-through.
(Goldman)
Remember, 18% of those polled by BofA in the latest installment of the bank’s rates and FX sentiment survey chose “nothing” when asked what could bolster inflation expectations across the pond.
“While a deposit rate cut at next week’s meeting is possible, we think that action is more likely in September given new staff projections, the timing of the next FOMC meeting and the need to find common ground on an easing package”, Goldman wrote Friday, on the way to predicting “a dovish tilt in the ECB’s language to avoid a tightening in financial conditions, including a return to the ‘or lower’ easing bias for policy rates and an indication that the ECB will analyze QE options for September” at the July meeting.
“We think President Draghi’s rhetoric will sound convincingly dovish and weigh on the EUR, even as the ECB keeps its depo rate unchanged this week”, Barclays says, adding that they see tweaks to the forward guidance and also expect Draghi “to say that the ECB has tasked committees with studying various easing options for the September meeting involving most if not all of the following: short rate cuts; mitigating measures to help banks cope with a prolonged period of negative rates; a fresh round of QE; and associated forward guidance changes”.
Whatever happens between now and the end of the year, Europe isn’t likely to shake the “Japanification” label any time soon. The sub-zero club is expanding for benchmark yields and virtually nothing offers more than 1%.
(BofA)
Euro-area flash PMIs are on deck this week, and those will be watched closely for any bright spots or green shoots.
BoJo cometh
In the UK, Boris Johnson will almost surely be announced as the new Prime Minister.
On Sunday, finance minister Philip Hammond indicated he’d likely resign because he can’t bring himself to support a leader willing to take the country out of the EU with no deal. “I am sure I am not going to be sacked because I am going to resign before we get to that point”, Hammond told the BBC. “Assuming that Boris becomes prime minister, I understand that his conditions for serving in his government would include accepting a no-deal [Brexit] on the 31st of October. That is not something I could ever sign up to”, he added.
The pound is obviously flagging. The currency is at a two-year nadir versus the dollar and is coming off a record streak of losses versus the euro.
“With the GBP NEER dropping to the lowest level in two years, we expect some near-term consolidation”, Barclays said over the weekend, before warning that the pitfalls are myriad.
“The near-term risk is one where the opposing Labour party proposes an immediate no confidence vote, which could lead to a complicated morass in UK politics [while] the medium-term risk for GBP remains linked to the schedule of the House of Commons, as Parliament will break for a six-week summer recess on 25 July, and reconvene on 3 September”, the bank cautions. “There will be another short break for party conference season just over a week later, leaving only October to concentrate on Brexit discussions before the 31 October deadline”.
(Barclays)
Pirates
Needless to say, tensions between Tehran and the West are running at a fever pitch after the seizure of two UK-linked tankers on Friday, a development which came just a day after the US Navy downed an Iranian drone.
Iran over the weekend aired footage showing the IRGC commandeering one of the tankers. The UK is in a tough spot on this. Iranian foreign minister Mohammad Javad Zarif on Sunday accused John Bolton of trying to drag Britain into a “quagmire”. The Saudis were out Sunday evening decrying Iran’s actions in the Strait.
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All of this comes as Trump is purportedly weighing a “substantial offer” floated by Zarif. There’s also speculation that Senator Rand Paul will serve as a go-between for the administration and Tehran.
Despite the spiraling tensions, crude fell for four straight days through Thursday, before bouncing a bit on Friday afternoon as the headlines around the latest incident in the world’s most important oil chokepoint started to cross the wires.
Turkish delight
Turkey’s newly decapitated central bank will likely cut rates, joining EM counterparts Indonesia, South Africa and South Korea, who all eased policy last week.
Of course, Turkey’s circumstances are unique. Markets are on edge following President Erdogan’s decision to oust his central bank governor earlier this month, a move which underscored the notion that he isn’t going to give up on Erdogan-o-mics anytime soon. He said as much last weekend. Here’s a bit of color from Barclays:
The CBRT will have the chance to start its easing cycle this week, emboldened by lower inflation, reduced near-term uncertainty from US sanction threats and recent lira resilience. We expect the CBRT to reduce its policy rate by 200bp, less than currently priced (c.300-350bp), keeping the TRY supported in the very near term. A significantly larger-than-expected cut, which we cannot exclude, would be seen as a policy mistake, however, resulting in a sell-off and renewed market anxiety about the CBRT’s independence. Indeed, Turkish President Erdogan recently indicated that the CBRT may have more frequent (12 instead of 8) MPC meetings in a year, which would make it easier to deliver more substantial easing, albeit at a more gradual rate.
As alluded to in that excerpt, thanks to the Trump administration’s decision not to pursue sanctions against Ankara in connection with Turkey’s procurement of Russian-made S-400 missile systems, optimism is running high. Still, Congress isn’t satisfied that Turkey’s expulsion from the F-35 program is enough and, so, Trump once again finds himself at odds with lawmakers who think the White House isn’t being forceful enough in its relations with an autocrat.
The Borsa Istanbul entered its second bull market of the year last week, a testament to just how manic 2019 has been for the country and anyone who’s invested in Turkish assets.
Miscellaneous
Elections in Japan look to have produced the status quo, with Shinzo Abe declaring victory. As the New York Times notes, this “ensures his place in history as Japan’s longest-serving prime minister”, although it looks like he may fall short of securing the number of seats needed to revise the country’s pacifist constitution.
In Italy, it’s possible Matteo Salvini will pull the plug on the fractious coalition with Five Star, opening the door to new elections.
Hong Kong protests were in the news again over the weekend, suggesting the tumult rocking the city isn’t likely to abate.
Full calendar via BofA
