The surprise decline in the Michigan reading of US consumer confidence which dropped to 63.2 in August put a dampener on risk appetite at the end of last week helping to fuel a sea of red for most US and European equity markets at the close of play on Friday. Nonetheless, FX markets remained range-bound, albeit with the dollar taking a firmer bias at the end of the week.
The impact of the drop in confidence is likely to prove short lived as risk appetite continues to improve this week although don’t look for big market moves as summer trading conditions continue to dominate. For the most part the data releases should not throw any spanners in the works over coming days as a positive tone to data is set to be retained.
The highlights this week include more GDP data from Japan and Norway following surprise increases in growth from Germany and France in Q2 last week. Japan’s release showed a marginally softer than expected 0.9% QoQ increase in GDP with growth led by external demand and government stimulus measures. In contrast, capital spending continued to remain weak.
US numbers are set to show further improvement as likely reflected in manufacturing surveys including the August Empire survey and the Philly Fed. Similarly housing data including housing starts and existing homes sales will point to more stabilisation whilst Fed Chairman Bernanke is set to deliver a similar tone to the recent FOMC statement.
The highlight of the European calendar is the German ZEW survey and flash August PMIs. Firmer equities point to a higher ZEW whilst manufacturing indices are likely to reveal a slower pace of contraction. In the UK the minutes of the BoE MPC meeting are likely to reveal a unanimous vote for extending QE policy.
On balance, the beginning of the week is likely to see a bit of a risk aversion led sell off in risk currencies including commodity currencies such as the Australian and NZ dollars as well as weaker Asian currencies led by the likes of the Korean won but the pressure is unlikely to last for long. Nonetheless, Commodity currencies will face another layer of pressure from the sharp drop in commodity prices at the end of last week as reflected in the drop in the CRB index.