Back to top

Image: Bigstock

A Tale of Two Central Bank Groups: Global Week Ahead

Read MoreHide Full Article

There is a big conundrum wrapped up inside this Global Week Ahead.

Isn’t it provocative?

To hold ‘live ammo’ central bank meetings across the developing world — and in Brexit England — while the world’s major developed country central bank heads enjoy a summer meeting on the coast of Portugal?

The former group of countries (Brazil, Mexico, Taiwan, the Philippines, Thailand and Hungary) is under major currency stress. This is imposed, in part, by the latter’s (the ECB, the U.S. Fed and Japan’s) changing stance on its extraordinary monetary policy stimulus decisions.

Here are Reuters’ five big themes likely to dominate the thinking of investors and traders in the coming week.
I listed the underlying factors in order of importance to global equity markets.

(1) The “Submerging” Developing Markets Hold Central Bank Meetings

Brazil, Mexico, Taiwan, the Philippines, Thailand and Hungary all have central bank meetings this week.

With the U.S. dollar crashing through emerging market currencies like a wrecking ball right now, what the banks do and what they say will be important.

Reuters’ polls show they are all expected to hold their fire for now, although there is an outside chance that Mexico and the Philippines could pull surprise hikes. That means it will mostly be about the rhetoric and who might be preparing to move.

Brazil's markets are pricing 2.5 percentage points worth of hikes between now and this time next year. Mexico sees around 75 basis points. Thailand and Taiwan may point to one or two hikes later in the year, and even Hungary's central bank is expected to ditch its dovish tones in the wake of a sharp fall in the forint.

(2) A Big Developed Country Central Bank Confab Happens in Portugal

On Monday, a three-day ECB forum on central banking kicks off in Sintra, Portugal, but under a very different backdrop to last year's summit.

The ECB has warned markets it will end its bond-buying program by the end of the year, but it has also pledged to keep rates low possibly until after summer 2019. That has cheered bond and stock markets no end, but less so the euro.

Rewind to a year ago when ECB chief Mario Draghi told the folks gathered at Sintra that deflationary forces had been replaced by inflationary ones, putting markets on alert for tweaks in the ultra-loose policy.

Yet with the end of ECB QE now in sight, a taper tantrum along the lines of last year's appears to have been avoided. Italian bonds have just enjoyed their best week since September 2012. But Sintra speakers will still be listened to because any signs of a European growth setback could complicate the QE exit path. Next Friday's "flash" Eurozone PMI data for June may also provide some insight on this front.

More generally, Sintra is a big central banking shindig: alongside Draghi will be the Bank of Japan's Kuroda and the U.S. Federal Reserve's Jerome Powell. All three have had their moment in the spotlight in the past week at their central bank meetings.

But another big-name governor — the Bank of England's Mark Carney — is not scheduled to speak. His bank holds a policy meeting next Thursday, though it is not expected to change interest rates.

(3) On Thursday, U.S. Fed Bank Stress Tests Come Out

In June 2017, when U.S. banks cleared the Federal Reserve's annual stress test, their shares surged as the results unleashed a massive round of stock buybacks and dividend increases.

Don't look for the same outcome this week when the 2018 vintage is released.

The largest U.S. banks have notably underperformed their smaller, regional rivals so far in 2018, and even if some do get more cushion to increase their capital return programs, few analysts believe that will be enough to put them back in the lead.

A flattening yield curve and underwhelming loan growth are among the big culprits weighing on the performance of large banks, and that doesn't look like it's changing anytime soon.

The latest Fed data on commercial and industrial loan growth shows smaller banks holding a greater-than-4-percentage-point lead over large banks in that key lending category. Small bank C&I loan growth is up 6.7 percent year over year, while for the biggest banks it is just 2.4 percent.

And the Treasury yield curve — a key indicator of bank net interest margins — has flattened further since the Fed's latest rate hike. The spread between 2-year and 10-year Treasury yields is below 40 basis points and the narrowest in nearly 11 years.

(4) An OPEC Meeting Happens. They Review Their Production Agreement

OPEC and its oil allies meet in Vienna on Friday and Saturday this week, to review their production agreement.
U.S. President Donald Trump has again been blaming the group for rising oil prices they are up almost 60 percent over the last year — so the political pressure is on to pump more.

The big producers are divided, though. While Russia is pushing for a significant output hike, Saudi Arabia favors a modest one. Others, like Iran, Iraq and Venezuela, want no change at all.

Most oil watchers do expect an increase, however, before the end of the year. Negotiations should therefore center on the scale, timing and phasing of any output boost. Also key will be whether it is agreed by the entire group or implemented by Saudi Arabia and Russia without wider backing.

(5) Turkey Has June 24th Elections

Several things are complicating life for Turkey's Tayyip Erdogan before the June 24th elections.

Hoping to use a beefed-up presidency to tighten his grip on the economy and monetary policy, Erdogan is finding he may not win in the first round after all. What's more, the AK party could even lose its parliamentary majority.

Second, the lira is heading rapidly back to record lows despite 425 bps in interest rate rises. With the Fed propelling the dollar higher, the lira's woes might continue. Its weakness will certainly exacerbate double-digit inflation. On economic growth — which Erdogan touts as one of the triumphs of his 15-year tenure — there are warnings.

Data shows Turkish growth running at 7.4 percent, making it one of the world's fastest-growing economies. But borrowing costs have soared, with the government paying almost 16 percent for 10-year cash in local bond markets, up 500 bps since the end of 2017.

That could hint at a sharp slowdown because the growth bonanza hinges largely on credit, which is expanding around 20 percent year-on-year. Indeed, Turkey's highly indebted companies and banks may already have run into trouble. For Erdogan, a self-declared "enemy of interest rates,” it could mean accepting more rate rises and slower growth. First though, he needs to win the election — at least in the second round.

Top Zacks #1 Rank (STRONG BUY) Stocks—

(1) Amazon (AMZN - Free Report) : It’s an $832B stock now. And the long-term Zacks VGM score is a solid F, with an F in Value.
Nobody cares about Value stocks, only chasing Momentum stocks like this higher and higher. When does that tune change?

(2) Chevron (CVX - Free Report) : OPEC holds a meeting in Vienna this week. This is a Zacks #1 Rank stock with a Zacks VGM score of A.

There’s an A for Growth here. That is contingent on stronger oil prices.

(3) Mastercard (MA - Free Report) : It’s a $200 stock now, with a $208B market cap, due to the ongoing shift to digital transactions.

We don’t need to talk more about Bitcoin. We DO need to talk more about Mastercard and Visa.

Key Global Macro—

On Tuesday, U.S. housing permits and starts data comes out.

On Wednesday, Fed Chair Powell speaks on a panel titled “Monetary Policy at a Time of Uncertainty and Tight Labor Markets.” Mario Draghi of the ECB and Governor Lower of the RBA (Australia’s central bank) will also be on this panel.
On Thursday, the Fed’s stress tests on large banks come out, and the Bank of England (BoE) holds a monetary policy meeting. No rate change is expected.

On Friday, the Eurozone PMIs come out.

On Monday, the Turkish unemployment rate fell to 10.1% from 10.6%. This is good news in a country experiencing EM currency turmoil.

On Tuesday, the Swedish unemployment rate comes out. Sweden still maintains a negative interest rate. And the prior reading was 6.3%.

The unemployment rate in Hong Kong is 2.8%. We get a fresh reading. It’s hard to see it going lower. It will be interesting to watch in coming months if it indeed goes higher, after the U.S.-China tariffs are in effect.

U.S. building permits and starts data comes out. The permits should rise to 1.37M from 1.35M. The starts should also rise to 1.34M from 1.287M. It’s summer construction season here.

Argentina’s GDP growth rate comes out. The quarterly reading should be up +0.9% q/q. The y/y reading looks to be +3.6%. Again, this is solid, given the EM currency turmoil.

On Wednesday, the German PPI comes out. The prior reading is at +2.0% y/y.

The CPI in South Africa, another currency turmoil candidate, comes out. It should go higher to +4.7% y/y from +4.5% y/y.

The unemployment rate in Russia, the host of the World Cup, is 4.9%. We get a fresh reading.

On Thursday, the Dutch unemployment rate is out. It has been super-low at 3.9%. That’s tops in Europe.

The Bank of England (BoE) should leave its base rate at 0.5%.

U.S. initial claims should be very low at 218K.

On Friday, the Eurozone composite PMI should come out. The prior reading was 54.1. The manufacturing PMI is at 55.5 and services at 53.8. Interesting to see the manufacturing reading higher. That is bullish, if it holds up.

The U.S. manufacturing PMI prior is 56.4. This is better than Europe, but the difference is de minimus.


See More Zacks Research for These Tickers


Normally $25 each - click below to receive one report FREE:


Amazon.com, Inc. (AMZN) - free report >>

Chevron Corporation (CVX) - free report >>

Mastercard Incorporated (MA) - free report >>