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As pointed out in the previous notes, there are really no fundamental drivers in the risk rally, which means at some point, the gains will be given back.
The markets will remain in a heightened state of volatility, as UK grappled with the aftermath of the UK referendum. This means any risk appetite is expected to be limited. We have also yet to see much coordinated response from the central bank community.
Market noises will be plenty, as the path ahead stays blurry. Added to that is the fact that the country has yet to invoke Article 50, which will officially start the exit process. However, before this, the ruling conservative party will need to choose its next Prime Minister. As of now, it will be an all-female tussle, with Home Secretary, Theresa May, and Energy Minister, Andrea Leadsom, being the final two.
Politics aside, the Bank of England (BoE) will announce their first monetary policy decision since the Brexit vote. Previously, Governor Carney said that more easing may be needed over the next few months to combat a material slowing in the UK economy. More stimulus could see another bout of weakness for the pound. GBP/USD is currently trading below 1.30, touching fresh 31-year lows in the week. The trade-weighted broad GBP index also fell deeper to a four-year low.
Japan will go to the polls this Saturday, 9 July, to elect half of the Upper House, where 121 seats are up for grabs. Prime Minister Shinzo Abe needs to secure a two-third majority in order to revise the nation’s constitution. Meanwhile, the Finance Ministers of the Euro-area and European Union will be meeting to discuss Italian banks, Greece, as well as objections to Spain and Portugal budgets.
On the data front, China will report its Q2 GDP data on 15 July, where the economy is expected to slow further to 6.6% YoY from 6.7% in Q1. The Chinese slowdown has been a major concern on the global stage, as Chinese fiscal stimulus and strong growth were responsible for dragging the world economy from the depths in 2010 following the global financial crisis.
Slowing growth in China may affect Beijing’s ability to rein in high levels of corporate and state government debt. In fact, some Federal Reserve officials expressed worries over China’s management of the yuan and the impact of rising debt in the country. It seems increasingly unlikely that the Fed will not raise rates this year until we see improvement in the US economy, jobs gains and inflation. Fed policymakers will have a talk-fest in the coming week, with at least 12 speeches lined up.
Singapore dollar surges
A flight to safety has boost demand for the Singapore dollar. According to the SGD NEER (Nominal Effective Exchange Rate) Index, the SGD has strengthened significantly, which could pose problems for the local economy. Firstly, a stronger currency will affect Singapore’s trade competitiveness. Secondly, substantial SGD appreciation will undermine the effectiveness of the current Monetary Authority of Singapore (MAS)’s stance, which is a neutral policy of zero SGD appreciation.
Singapore will report its advance Q2 GDP figures next Thursday, 14 July, and the economy is expected to expand at a faster pace of 2.3% year-on-year in Q2. A weaker GDP number may pressure the MAS to ease further in the October policy meeting.