The week kicks off with a G8 leaders’ summit in Northern Ireland. Syria will dominate the gathering and the British agenda on tax avoidance is likely to be long on rhetoric, short on specifics. But for the markets, this meeting could still yield some big news. For a start, Japanese prime minister Abe is there – the man who has launched one of the most aggressive stimulus drives in history yet has already seen the yen climb back to the level it held before he started. Abe will also speak in London and Warsaw during the week.
The financial backdrop could hardly be more volatile with emerging markets selling off dramatically since the Federal Reserve warned the pace of its dollar creation could be slowed. Berlin has said the G8 leaders are likely to discuss the role of central banks and monetary policy, and Angela Merkel will hold bilateral talks with Abe during the summit. President Barack Obama travels to Berlin after the summit for talks with Merkel.
The central banks of Turkey, Switzerland and Norway all have monetary policy decisions to make in the coming week and may have some interesting things to say about the revival of market turmoil after months of calm. The Norwegians have said interest rates are likely to stay at 1.5 percent for months to come and the Swiss National Bank is unlikely to loosen its cap on the Swiss franc which has served it so well, particularly given markets are now back in flux and traders are starting to talk about flight-to-safety moves again. The elephant in the room is the Federal Reserve’s latest policy decision on Wednesday, followed by a Ben Bernanke press conference.
The Turks are the hottest story of the moment on our patch with Prime Minister Tayyip Erdogan first saying his patience had run out after almost two weeks of anti-government protests, and then sounding more conciliatory, holding talks with protest leaders. How this ends will go a long way to dictating the investor view of Turkey and how its markets recover (if at all) from a drubbing inspired by a perfect storm of domestic and international factors – about $8 billion had fled Turkish markets from the beginning of May to last Wednesday and a gaping current account deficit doesn’t help.
The central bank has already come in to defend the lira and while it said it saw no need to raise the upper band of its interest rate corridor who knows what the next few days will bring. At its May meeting, it cut all its key rates by 50 basis points, but with the lira under huge pressure you can rule out a repeat of that. Indonesia was first out of the blocks in recent days, becoming the first central bank in Asia to raise rates since 2011. It’s early days but a repeat of the capital outflows that marked the Asian financial crisis of the late 1990s is an unpleasant reminder of the damage that can be wrought.
The euro zone bears watching as always, now we’re back into turbulent times.
Spain, France and Germany all hold bond auctions during the week with the benevolent bond market conditions of the first five months of the year now gone. Italian and Spanish borrowing costs fell for 10 months after European Central Bank chief Mario Draghi pledged to do whatever it takes to save the euro but have begun creeping up since Bernanke’s intervention. Both countries have frontloaded their funding for this year, so some of the pressure is off. Germany could start to benefit from safe haven status again so maybe France is the most interesting. Its economy is flatlining, the government is railing against exhortations from Berlin and Brussels to raise the pace of structural reform and yet it can still borrow for 10 years at not much more than two percent.