ECONOMETER

After having been on the road visiting clients across Asia over the last two weeks the overall tone to markets feels slightly better than when I left. Risk appetite is improving as central banks attempt to dampen the spike in yields, by initiating “forward guidance”. On balance, markets appear to be making the volatile transition to Fed tapering with less angst than a couple of weeks back.

Despite the confusion over China’s GDP growth target the tone at the start of the week is positive. China’s Q2 GDP slowed compared to Q1 coming in at 7.5% YoY from 7.7% previously but arguably last week’s comments by China’s Finance Minister that China was targeting growth of 7% (later revised in to 7.5%) had arguably done a good job in guiding market expectations lower. In the event the market reaction to the Q2 GDP release was limited.

Aside from China’s data, markets have taken their cue from Fed Chairman Bernanke’s dovish comments last week when he noted that policy will remain “highly accommodative” for the “foreseeable future”. Discomfort at the sharp rise in US Treasury yields will have played a part in spurring such comments, with the net impact being one of improved risk appetite.

Further clarification from Bernanke will be sought during his semi-annual monetary policy report to Congress mid week although he is unlikely to diverge from his recent comments. Nonetheless, US yields and the USD will likely creep higher over coming days helped by firmer data including the June retail sales report today.

Eurozone markets will have little on the data front to digest aside from the German July ZEW survey this week, leaving the fragile state of Portuguese politics in the spotlight. Potential for fresh elections remains a distinct possibility although discussions over forming a new government will continue this week. Overall, this would suggest some underperformance of Eurozone markets and the EUR over the coming days.

In the UK the release of CPI inflation data in June and Bank of England MPC minutes will garner most attention. Inflation is likely to have pushed through the 3% threshold, requiring new governor Carney to write a letter to the UK Chancellor Osborne explaining the reasons for the rise in inflation pressures. Meanwhile the MPC minutes will take a slightly more hawkish stance, with a 7-2 vote expected as Carney will most likely have sided with the majority unlike his predecessor. Against this background GBP is set to gain some ground, especially against the EUR.

Asian currencies made up some ground following the Bernanke inspired drop in the USD last week but given that the region continues to suffer from equity portfolio outflows gains will be difficult to hold over coming days. Nonetheless, the good news is that the haemorrhaging in capital flows to the region has diminished, with only USD 73.6 million in equity outflows from Asia registered month to date.