Trading Week Ahead

Week of August 7

Markets took a decidedly risk-off tone last week despite better-than-anticipated earnings due to the surprise downgrade of the US credit rating by Fitch. As earnings season winds down and fewer economic data events scheduled in the coming days, the focus will be on US inflation figures.

Tops Events in Review

The week was dominated by the surprise downgrade of US sovereign debt to AA+ from AAA by Fitch, the second time a ratings agency has done that in history. The last time was in the turmoil of 2011, followed by underperformance in the stock market. Fitch cited rising debt and running out the clock on the debt ceiling as increasing the risk of default. The action overshadowed generally positive earnings reports, including macro data suggesting that the US economy remains resilient and prices are coming down. Labour costs fell more than expected. 

In central bank action, the BOE raised rates by a quarter of a point, as anticipated, and left the door wide open for another hike in September. The RBA kept rates unchanged, surprising to the markets, though suggested that more rate hikes might be needed. Aussie recorded its 3rd losing week, exposing 65 cents on the one side and $0.6657 on the other. The BOJ was seen allowing JGB yields to rise after tweaking its YCC mechanism but stepped in twice to buy an extraordinary amount of bonds to defend the upper end of the yield curve. USD/JPY bulls might attempt a ¥144.80 takeover unless bears gain control of ¥138.75.

The US DOE reported a record drawdown in crude inventories as demand for gasoline increased through the summer. 

Eurozone inflation was slightly above expectations, but GDP was first reported at 0.3%, removing the risk of a technical recession that was narrowly avoided over the winter.

Biggest Market Movers

Nasdaq fell more than 3% at some point last Thursday following the loss of US credit rating and disappointing results from Apple and AMD and at the conclusion of its extraordinary weighting rebalance to reduce the overconcentration of certain companies on the index.

The dollar index gained less than 1% as yields rose across the curve following Fitch's rating move, with the yield curve inversion falling to -70bps. The DXY put a 3-week winning streak in, distancing itself from double digits and opening the door to 103.00 territories.

Top Events in the Week Ahead

All Eyes on US Inflation

US Inflation is expected to be the main event of the week, with the release of CPI and PPI data. The Fed will not meet this month but has said it will focus more on data releases from here to the next policy decision. US headline inflation is expected to drop to 2.8% from 3.0% last reported, which would support continued growth in real wages.

Core inflation is also expected to decrease slightly but remain at more than double the target rate at 4.6%, compared to 4.8% in June. Later in the week, the monthly PPI is expected to show that inflation pressures have not completely abated, as it is expected to rise compared to June. Michigan Consumer Sentiment is also expected to show resilience.

With no major events in the Euro Area, EUR/USD might move on expectations around the dollar's performance. Expected support under the $1.09 handle lies at $1.0835, while projected resistance is at $1.1016 and $1.11.

UK Economy Seen Struggling

The UK will end the week with a barrage of data, with the first look at Q2 GDP figures likely to be the main focus. Quarterly growth is expected at 0.1%, the same as the prior quarter. But that implies an annual growth rate of -0.8%, down from 0.2% due to the faster-growing economy in the second quarter of last year. Monthly GDP growth for June is expected to return to a positive 0.1% from -0.1% in May. UK manufacturing production is also expected to return to positive after being negative the month prior but still accumulate an annual decline of -0.3%. However, that would be better than the -1.2% reported previously.

Cable is anticipated to have a volatile week with all events scheduled in, with doors to $1.2481 and $1.30 both open. Interim levels can be seen at $1.2548 and $1.2870.

China Trade Balance

The world's second-largest economy is expected to report a slightly smaller trade surplus but a significant drop in trade. Both imports and exports are expected to fall, but exports are seen doing much worse. Exports are expected to fall -14% compared to 12% in June, while imports are expected to drop -5.2% compared to -6.8% in the prior month. 

With six weeks of consecutive gains, WTI could be partially impacted by China’s data. Resistance above $84.80 lies at $87.20 per barrel, with expected supports at $79 and $77.10.

Other Events and Earnings

Monday has UK Halifax house prices. On the schedule for Tuesday are Australian Westpac Consumer Confidence and NAB Business Confidence. Wednesday sees China's inflation figures. Moreover, Chinese vehicle sales figures come out on Friday.

Earnings season will start winding down, but there are still a substantial number of large names reporting, such as KKR, Palantir, Flutter, Eli Lilly, UPS, Antofagasta (which already provided production figures), Walt Disney, Alibaba, and Persimmon.