Macro Weekly – Geopolitics dominate…for now

by: Han de Jong , Nick Kounis , Roy Teo

Macro Weekly - 11 August 2014 - Geopolitics dominate…for now.pdf ()
  • Big Picture: Risky assets took another tumble last week. What started as a phase of profit taking on markets for risky assets is turning into a severe correction in some markets. Rising geopolitical tension is the main culprit, while economic data across the globe varied last week from ‘so-so’ to very good. Assuming no significant further escalation of conflicts, we think the economic impact of the various sources of tension will remain limited. Economic fundamentals should take over again as drivers of financial markets in due course.
  • Rates: The ECB still sees developments as being broadly in line with its base case but admitted that geopolitical risks had risen. We do not expect QE, but an ABS programme is possible and policy rates are likely to be on hold in 2015-16. Meanwhile, core eurozone and US government bond yields fell further on the escalating geopolitical risks. As long as these risks linger, together with the possibility of further ECB stimulus, demand for ‘safe’ government bonds will remain strong. However, we expect yields to turn up later in the year.
  • FX: Volatility in currency markets also rose on the intensifying geopolitical tensions. The resulting deterioration in risk sentiment supported safe haven currencies like the Japanese yen and the US dollar. The latter was also supported as US data releases generally came in better than expected. The euro eased lower due to worries about the economic outlook and comments from ECB President Draghi. Meanwhile, emerging market currencies extended their decline last week, with the exception of the Chinese Yuan.