What we will track in the markets next week (27.08.2018 - 31.08.2018)

The event of the week was Jerome Powell's speech at Jackson Hole, which the markets interpreted as dovish. This pushed the euro the to the key support level at 1,162. As we explained last week, the 1,162 level is decisive for the EUR/USD and for the DX, dollar index. A strong break out above 1,162 can be the first stage of a longer-term trend reversal in the dollar. The fundamentals that will likely exert the largest influence on whether the euro strengthens further or not will be Turkey: its banks are opening after a week-long holiday. Their attitudes towards the Turkish lira will largely dictate the mood on European markets next week.

The EUR/USD is locked between the resistance from the diagonal trendline (and Fibonacci 61,8%) and the support at 50% Fibonacci. The RSI is pointing upwards from oversold levels, which indicates a likely retest of the resistance in the coming days.

We will track European banks with large exposures to Turkey like UniCredit and BBVA, as well as USD/TRY for signs of the market's mood towards Turkey.

Despite solid growth in the Germand and the EU economy as a whole, European stocks remain depressed in their valuations relative to their American counterparts. This is largely due to political factors, not economic and business ones. This largely stems from uncertainty as to the future relationship between the EU and Turkey, Russia and Great Britain, for instance. European technocrats provide no clarifications either. As a result, European business suffers. However, as we described in our post from this week, we are looking for possible long positions in the depressed/cheap European auto sector: Do we see the bottom for VOW, BMW, DAI?

The decline of the Russian ruble continued, primarily due to the threat of American sanctions. Additionally, inflation in Russia has been above 10% in the last three months, while its growth after the 2014-2017 recession has been anaemic. Many Russian firms have dollar denominated debt: however they choose to extinguish it, it will place additional pressure on the ruble and on the Russian economy.

American markets continued their show of strength. The S&P500 reached an all-time high last Friday. This marks the first time in history, as J. P. Morgan analysts noted, that American markets are in a bullish phase while markets in other developed economies are bearish. Investors are also bullish on the dollar, as can be seen from the latest COT report from the CFTC:

The dollar, however, has been under assault from several of the main constituents of the dollar index, DX. The USD/CAD slumped, after Canada reported 3% inflation, which likely meant faster rate hikes in Canada. Meanwhile, Jerome Powell's dovish remarks at Jackson Hole served to strengthen the euro against the dollar.

During the weekend, American senator John McCain passed away. He was a former presidential candidate, Vietnam War veteran and one of the most influential politicians in the past few decades. He was among the Republicans who sought bipartisan consensus with the Democrats and among the Republicans who opposed Donald Trump's politics.

This week we expect PCE data from the US (29.08.2018); the PCE measure of inflation is the preferred inflation measure for the Fed. We will also track data on consumer confidence in the EU (29.08.2018), US trade balance (29.08.2018).

Chart: Movement Capital

Source: Bloomberg Finance L.P.

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