Here are the big questions FT markets are asking as a new trading week beckons.
What counts as a quiet August?
As traders and investors head to beaches, villas and dachas, markets will tick along with diminished activity and depth. So in a year already characterised by some of the lowest volatility for prices seen in decades, a summer slumber seems likely for asset prices.
Yet August can be exciting, as in 2015 when China stunned markets with a sudden currency devaluation. When surprises come along, the absence of senior staff can add to the violence of market moves, as the weight of money and authority isn’t there to lean against the momentum.
With Brexit occupying minds last year, the question might then be what counts as a quiet summer? The wildest this decade was 2011, which began with a crisis over the US debt ceiling. A newly elected Republican Congress forced a confrontation with the executive, coming close to preventing the government paying its bills, then shortly afterwards Standard & Poor’s downgraded the long-term credit rating of the US.
That month $2.3tn worth of shares changed hands on the New York Stock Exchange, more than double the volume of trading in the quietest August this decade, the gentle summer of 2012.
This year is shaping up to be nearly as calm, with July only slightly busier than 2013. After all, the US debt ceiling doesn’t have to be raised till September.
Has the euro got the legs to break $1.20 after US jobs data?
A gain of 209,000 jobs and US average hourly earnings rising at annualised pace of 2.5 per cent for July, sparked a boost for the dollar and bond yields at the end of last week.
Scope for a further bounce in the dollar may well loom this week thanks to the fact that being bearish on the currency has become a very crowded trade. BNP Paribas noted last week that short US dollar positioning reached a six-year extreme according to their analysis.
Still the main theme for the currency market is how the relative absence of US inflation and stronger economic growth has triggered a severe breakdown in the reserve currency this year. Political turmoil in Washington and the absence of fiscal stimulus has not helped the dollar’s cause. A weaker dollar has invigorated emerging markets and carry trades, while presenting a challenge for the European Central Bank.
As the euro loiters shy of $1.20 versus the dollar and gains significantly against the yen, swiss franc and sterling, among others, momentum still favours the single currency. The main risk for euro bulls is whether the ECB starts talking down the single currency as further strength risks tightening financial conditions.
How long can central banks talk softly without swinging their big sticks?
Last week the Reserve Bank of Australia was the latest keeper of monetary policy to comment on improving economic conditions without doing anything. It said in a statement that “domestic economic data have been mostly positive in recent months”, and presented forecasts which indicate robust growth and rising inflation.
The US unemployment rate, meanwhile, is 4.3 per cent, the lowest in 16 years. Canadian unemployment is at a nine-year low. Mark Carney, governor of the Bank of England, said interest rates were likely to rise further over the next two years than markets were forecasting.
For all the talk of co-ordinated monetary policy normalisation, central bank policies worldwide are stuck at the “emergency support” setting. At some point at least one of them might deliver a surprise.
Goldman Sachs, for instance, finds the RBA’s policy stance incompatible with the state of the economy. “The market is underestimating the risk that a very modest amount of monetary stimulus is withdrawn by the end of the year”, say its strategists, who expect a November interest rate increase. If financial markets can be rolled with words, imagine how they might respond to action.