‘Playing With Fire’ – Full Week Ahead Preview

Ok, well if you didn’t get enough “fire and fury” during the work week, there was plenty to be had on Saturday in Charlottesville where a large contingent of exceedingly irritated white nationalists turned a peaceful college town into Bakaara Market for a day.

One daily in Charlottesville ran this cover story:

So if you were looking for a reason to think the risk-off mood that prevailed in the wake of Trump’s bombastic rhetoric on North Korea and subsequent threat to invade Venezuela might spill over into Monday, “deadly weekend Nazi rally” should suffice.

It’s not 100% clear to me that central banks, even with the printing presses running full bore, can offset what has become an absurdly precarious geopolitical/policy backdrop. Between the domestic situation in the U.S. (which includes the upcoming debt ceiling debate), North Korea, and Venezuela, this is quickly careening into something that approximates outright insanity.

And all of this ahead of Jackson Hole and a September which was supposed to mark a decisive turn towards balance sheet normalization for both the Fed and the ECB. Not to put too fine a point on it, but Yellen and Draghi may well have to postpone that effort to avoid throwing gasoline on a “furious” geopolitical “fire.”

We’ll get minutes from the Fed, the ECB, and the RBA this week and you shouldn’t think those will be non-events. Here’s BofAML:

For the Fed, focus is on the inflation outlook and discussion of transitory vs persistent factors. Our US economists think the minutes will show general agreement about the roadmap for balance sheet normalization. Furthermore, a discussion over the neutral rate could be on the table, given the recent Fed talk. We also have the ECB minutes where our EU economists think focus is on FX and QE after Dec-17. The opening statement by the ECB’s chief economist is likely to insist and possibly quantify on the impact of the stronger euro on the inflation outlook. We also see the potential for remarks on the recent tightening in wider monetary conditions.

You’re reminded that FX markets are listening very closely for any sign of policy divergence between these central banks. If there is anything – and I do mean anything – in those minutes that’s worth trading on, you can bet someone (or some robot) will find it. Just look at what the aussie did after the last RBA minutes were released – here’s a reminder:

That triggered a mad scramble by RBA policymakers to assure the market that the interpretation was wrong and ultimately, aussie strength has been in focus ever since. Perversely then, the minutes ended up being the subject of the next policy meeting, a hilarious example of the tail wagging the dog.

So there’s that.

There’s retail sales galore this week in terms of econ, including data from China and the U.S. Here’s the China docket for today (i.e. Monday):

• 10am: (CH) July Retail Sales YoY, est. 10.8%, prior 11.0%
• 10am: (CH) July Retail Sales YTD YoY, est. 10.5%, prior 10.4%
• 10am: (CH) July Fixed Assets Ex Rural YTD YoY, est. 8.6%, prior 8.6%
• 10am: (CH) July Industrial Production YoY, est. 7.1%, prior 7.6%
• 10am: (CH) July Industrial Production YTD YoY, est. 6.9%, prior 6.9%

Those will be watched closely following the disappointing July trade data – remember, the market was in a forgiving mood in terms of the yuan after exports and imports missed as traders preferred to focus on the surplus. And indeed the yuan will be in focus “bigly” after hitting a 12-month high against the dollar last week only to fall the most since January on a weaker-than-expected Friday fix.

You’ll want to watch South Korea closely for obvious reasons. We just got this headline from 38 North:

• Recent satellite imagery suggests North Korea may be preparing for a new series of “at sea” test missile launches

Of particular note will be CNYKRW, a pair that’s become something of a barometer for Asia risk. Here’s a bit of color from Barclays:

And when it comes to trade, don’t forget that the Trump administration is said to be readying a crackdown on China in retaliation for Beijing’s perceived unwillingness to “cooperate” on the Pyongyang issue.

Needless to say, all eyes will be on the VIX this week as warnings about the potential for inverse and levered products to panic-buy VIX futs into a vol. spike grow louder every day.

Don’t get too comfortable, because as Barclays reminds you, we’re all “playing with fire” at this point…

Here’s a full calendar from BofAML: