Weekly View – Deal is off

The tragic assassination of Japan’s longest serving prime minister, Shinzo Abe, sent reverberations of shock around the world. During his time in office, Abe achieved several key changes in Japan, not least of which was his famous Abenomics policy aimed at restoring economic growth via a strong push towards monetary easing and yen weakening. In Japan’s upper house elections on Sunday, the ruling Liberal Democratic Party was victorious, giving current prime minister Fumio Kishida a mandate to progress with his ‘New Capitalism’ policy agenda. Meanwhile, the UK’s prime minister Boris Johnson finally stepped down in the wake of 44 resignations within his government. While it is too early to determine who will succeed him, we may expect more fiscal support for British households and tighter monetary policy. The pound stabilised on Johnson’s departure announcement.

The euro was the week’s big loser after Germany announced its first trade deficit since 1991 and gas prices continued to move higher. In spite of this, with the right backstop to help peripheral euro countries, we believe the European Central Bank should accelerate its rate rises to flatten the yield curve and stabilise the euro, starting at its next meeting on 21 July. Meanwhile, the energy sector is becoming European governments’ biggest headache, as illustrated by France’s full nationalisation of utility company EDF and Germany’s bail out of Uniper. Bigger governments on the back of the pandemic support our Who pays the bill theme. The European continent’s economic weakness is particularly apparent vis-à-vis the US, where job creation remains around the highest levels seen since the Second World War and the Fed maintains its hawkish tone as it focuses on avoiding “entrenched inflation”. US services also remain resilient, as last week’s stronger-than-expected ISM numbers show. Ten-year US Treasury yields regained ground on the data, moving back above 3%, suggesting the Fed will need to act further to tackle inflation. Markets expect another 75-basis point interest rate rise from the Fed later this month. The June consumer price index, released this week, will be key to predicting the Fed’s next move.

At the corporate level, we would be remiss if we left out out Elon Musk’s decision to abandon his USD44 bn Twitter purchase—a decision likely to result in a titanic legal battle unless the two sides settle out of court. The Q2 2022 earnings season starts this week with US banks. We will be monitoring the strength of loan growth as an indication of the US consumer’s resilience and watching how it compares to upcoming consumer sentiment surveys.