Week Ahead: Tariffs, ECB and NFP

Volatility is likely to remain elevated, given this week’s big falls in the stock markets, crude oil and Mexican peso, as well as the rebound in safe haven gold and a sharp rally in Japanese yen.

Volatility is likely to remain elevated, given this week’s big falls in the stock markets, crude oil and Mexican peso, as well as the rebound in safe haven gold and a sharp rally in Japanese yen. Undoubtedly, trade concerns will continue to dominate the agenda at the start of next week, before the focus (momentarily) shifts to other factors with plenty of high-impact data and a couple of central bank rate decisions to look forward to.

A bad month for equities got worse in the last day of May on Friday. European stock markets and US index futures, as well as the Mexican peso and Canadian dollar, further extended their declines after suffering heavy falls overnight. Already concerned about the escalation in the US-China trade spat, investors went in full panic mode after Donald Trump rather unexpectedly promised to impose a 5% tariff on Mexican goods, effective from June 10. The US President wants Mexico to stop immigrants from entering his country illegally and only then will it remove the tariffs. The news has more or less jeopardised the new North American trade agreement, which is why both the Canadian dollar and Mexican peso have tumbled.

Given the extent of the stock market falls, we wouldn’t be surprised to see a small oversold bounce and perhaps some bargain hunting here and there, later on in the day on Friday or early next week, even if sentiment is severely damaged by a US-led tariffs war. Concerned about the free-falling stock market, Trump might start posting positive tweets about the US-China trade situation again. Would that be enough to lift sentiment? We doubt it will beyond a short term bounce. Investors will want to see actions rather than mere promises as the trade situation has dragged on for far too long. So, any rebound we may see next week should be taken with a pinch of salt. With regards to Mexico, companies in the EU and elsewhere which have operations in the nation — and there are plenty of those, such as carmakers and banks — might struggle the most.

Of course, it is not just trade wars weighing on investor sentiment. The recent slowdown in global economic activity is also a major concern for investors, so next week’s data releases should be watched closely. On Friday, there was more evidence of a slowdown as China’s manufacturing PMI contracted again while German retail sales unexpectedly slumped 2% month over month. Here are some of next week’s data highlights:

  • Monday: Caixin China Manufacturing PMI and US ISM Manufacturing PMI
  • Tuesday: RBA (a cut to 1.25% from 1.5% expected) and Eurozone CPI
  • Wednesday: Aussie GDP, UK services PMI and US ISM Non-Manufacturing PMI
  • Thursday: ECB rate statement and press conference
  • Friday: US non-farm payrolls and Canadian employment reports
So, next week’s economic calendar is full with market-moving data. Therefore, the focus will not entirely be on tariffs and trade wars. Among the highlights are the US jobs report as well as interest rate decisions from the ECB and RBA, with the latter likely to loosen its belt.

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