For most investors and traders with grey hair, the phrase “history repeats itself or at least rhymes” dominates risk and portfolio management. The hope that started last week was that the crisis in Turkey was idiosyncratic and a buying opportunity for the divergent emerging markets.

The move beyond 7.20 TRY led to a contagion trade on banks in Europe and further pains elsewhere in emerging markets. Buying the dip didn’t work so well last week but it remains the siren call for next week with light data.

There is a bigger philosophical story behind how to trade markets in August with light volumes and light news – and that goes back to Tolstoy’s “War and Peace” where he uses the phrase “strange lightness of being” for Prince Andrew’s death. The heavy market moods that history repeats clashed with the view that life is fragile and only lived once. There is no means testing for past decisions in the present world because each moment is different.

The YOLO movement risk for markets next week seems significant as Turkey is breaking out of the traditional fixes for an economy suffering from an unwanted FX devaluation spurred by its battle over a US pastor held in house arrest for treason. Not going to the IMF, not raising rates to fight inflation, not pulling back the government budget – all are expected to lead to more trouble ahead with money flight ongoing.

Against this dire view, we have a defiance against US hegemony and the new phase of economic war. The reworking of the global world order with NATO battling the former Soviet Union and China seems a throwback to history and, also something scary as the hope for a multi-polar world becomes real and makes risk taking more difficult. The weight of heavy decisions pressing on the present against historical standards fights against this brave new world of relativism.

The push for change isn’t new, the reactions to such, however, are unique. The coordinated global easing efforts post 2009 that supported markets is in reversal. The effects on investor returns has been notable so far in 2018 with the divergence trades obvious as the US returns to just 0.8% away from its S&P 500 highs while EM shares trade in a bear market.

The Question for the Week Ahead: What are factors telling us about the market?

There is always a search for a bigger picture underway in August. Call this the summer vacation effect if you must, call it the natural shift for active managers to push for beating the market into September. There is no easy way to find “alpha” in a quiet, illiquid market. However, there is a way to identify the “beta,” and so spending time in August watching factors maybe the best exercise for the Autumn shifts. 

Last week in US markets, value beat growth. Carry trades continued to fail and short volatility worked in the US for bonds and stocks. This didn’t work so well elsewhere and that divergence maybe another key place to study as US safe-haven status drives money flows given US trade policy pains abroad, mixed with foreign policy sanctions, and the ongoing growth spurts from US fiscal policy changes. Over the long-haul value beats growth by 3.5% while of late this hasn’t been the case it may be returning and reflecting the opportunities for value abroad in particular.

Some see the last 30 years as a great convergence trade coming to an ignoble end. The buying of EM risks at the expense of the G7 has been most obvious in FX. But the rising volatility in EM as shown by TRY, ARS, BRL and others highlights the pain of carry and this convergence nearing a sharp and painful turn. The risks for markets in the Autumn revolve around how central bankers view this shift and whether rate hikes in G7 space mean an end to this game and a shift from buying growth stories abroad to searching for value at home.

The sense of a larger crisis is in play because of this – as rate hikes in EM to defend one’s currency and battle inflation prove a heavy load against the push for normalization of zero rates and QE.The feedback loop of EM pain to DM will be a key focus for the markets as they listen to the ECB, Fed and others in the weeks ahead.

Market Recap: 

The key fears last week – US Trade policy, Turkey and China dominated. The drop of the TRY and the unorthodox response from the government set the tone for weakness with many fears of contagion. Slowing growth in China was also a concern, and disappointing results from Chinese Internet giant Tencent Holdings appeared to play a large role in Wednesday’s sell-off. China/US trade talks offset some of the worst fears Thursday and Friday as did a good recovery in the TRY from 7.48 lows to 5.68. The new Turkey FinMin Albayrak said that Turkey would use fiscal measures to slow the economy, reduce its current account deficit, and lower the inflation rate, which is now about 16%. Qatar’s pledge of $15 billion in direct investment to Turkey also supported the TRY recovery.

As for the US data, it focused on US retail sales up 0.5% in July with core even better. Wal-Mart helped Thursday rally and confirmed consumer upbeat moods with earnings the best in over 10 years. US bonds didn’t react to the better data or the risk rally Thursday and Friday as safe-haven demand held. For Europe, Turkey drove contagion fears at banks and hurt the most. Wednesday Assumption day holidays added to illiquidity there. For China, weaker data and doubts about tech led the CNH to 20-month lows Wednesday.

Equities:

The MSCI all-country World Index fell 0.5% to 513.08 on the week – with lows Wednesday reversed Friday. The MSCI EM index went into bear territory this week – off 3.85% to 1022.94 on the week – with focus on Turkey dominating. The big bourses suffered with US, India and Japan better while China, Germany and UK all suffered.

• The US S&P500 rose 0.59% to 2850.13 on the week. Consumer staples shares led gains in the S&P 500 Index for the week, but real estate and utilities shares also outperformed. Energy stocks retreated with oil prices and performed worst, hurt by a rise in U.S. inventories The DJIA rose 1.41% to 25,669.32 with earnings driving. NASDAQ fell 0.29% to 781633 on the week with focus on TESLA. The Cboe VIX fell 3.95% to 12.64% on the week with Wednesday highs at 16.79%.
• The Stoxx Europe 600 fell 1.24% to 381.06 on the week. The German DAX fell 1.72% to 12,210.55, the French CAD40 fell 1.29% to 5,344.93 while the UK FTSE fell 1.41% to 7,558.59 on the week. The best performer was Sweden with OMX up 0.36% to 1622.71 while the worst was Italy MIB off 3.2% to 20,415.27 with banks key focus.
• The MSCI Asia Pacific fell 2.08% to 162.08 on the week. Friday's rally wasn’t enough to make up for Wednesday pain with focus on China. The China Shanghai Composite fell 4.52% to 2,668.97 on the week with Tencent and gaming focus. The Japan Nikkei fell just 0.12% to 22,270.38 while the Broader Topix fell 1.32% to 1697.53 on the week. The Hong Kong Hang Seng fell 1.11% to 22,270.38 on the week with HKMA intervention in FX notable. The Korea Kospi fell 2.45% to 2247.05 on the week while the Australian ASX outperformed and rose 0.97% to 6,339.23 on the week with India Nifty 50 flat at 11,470.75 with oil and INR sharply lower.

Fixed Income 

Safe-haven buying and pain in EM dominated last week. The focus on central banks responding to EM crisis was key with Turkey and China the main drivers. US bonds were bid despite equities while Europe saw spread trades to periphery being key with Italy leading the pain trade with banks and budget doubts. For Asia, the PBOC added liquidity but bonds were sharply lower while Japan didn’t do anything different and rallied. Next week the focus will be on the US Jackson Hole Fed Symposium, global flash PMI reports and the ongoing political tensions with US/China/Turkey and with hopes for NAFTA driving.

• US bonds see modest bull curve flattening with geopolitical concerns the focus. For the week - 2Y flat at 2.606%, 3Y flat at 2.679%, 5Y off 0.4bps to 2.741%, 10Y off 1.5bps to 2.86%, 30Y off 1bps to 3.02%.
• Canadian 10-year bond yields fell 3bps to 2.265% on the week despite higher CPI at 3% and BOC hike repriced, along with NAFTA hopes rising. Safe-haven appeal key.
• Japan JGB yields fell 0.2bps to 0.088% on the week – quietly bid week for JGBs with BOJ doing nothing different – focus shifts to data ahead with flash PMI and CPI key
• Australian 10-year bond yields fell 4.5bps to 2.54% on the week – watching China growth, US rates and RBA on hold as data mixed.
• UK Gilt yields fell 0.5bps to 1.235% on the week with 1.20% tested as Brexit doubts drive over the better data.
• German Bund yields fell 1.5bps to 0.30% on the week with 0.25% key base to watch with ECB comments key going forward as safe-haven buying drives.
• French OAT yields fell 4bps to 0.655% on the week with data ahead important
• Italy BTP yields rose 13bps to 3.11% on the week with banks hit on Turkey exposures, bonds hit on budget doubts and EU battles ahead.
• Spain Bono yields rose 4.5bps to 1.445% on the week with new Socialist government still earning market trust.
• Portugal 10-year bond yields rose 5.5bps to 1.835% on the week – dragged up with Italy
• Greek 10-year bond yields rose 13bps to 4.285% on the week – in lock-step with Italy.

Foreign Exchange

The US dollar index fell 0.15% to 96.13 on the week after 96.98 highs Wednesday with focus on US policy to Turkey, China. In EM FX, the USD was mixed with TRY leading gains from Monday record lows  –

LATAM: MXN up 0.1% to 18.89, BRL off 1.1% to 3.91 with 4.00 and politics key.  

ASIA: TWD up 0.2% to 30.7888, INR off 2.1% to 70.157, KRW up 0.35% to 1124.90, CNY off 0.45% to 6.8775 holding tests of 6.93 again. 

EMEA: ZAR off 3.7% to 14.638, RUB up 0.9% to 67.11, TRY up 6.8% to 6.0175. 

In Crypto Currencies: BTC $6,385 staged a modest recovery up 1.1% on the week (Futures up 1.6%), while ETH $298.50 fell 7.5% for the week.

• EUR:1.1440 up 0.20% on the week with a test of 1.13 and 1.1450-80 resistance holding – focus is on US policy/China talks, Turkey and Italy.
• JPY: 110.50 off 0.35% on the week with EUR/JPY off 0.1% to 126.40 – tests of 125 failed as did 110 with focus on equities/China/rates with 111.20-50 resistance.
• GBP: 1.2750 off 0.15% on the week with EUR/GBP off 0.4% to .8970 with better data not enough to offset Brexit doubts and Tory fears.
• CHF:.9960 off 0.10% on the week with EUR/CHF off 0.25% to 1.1385 with tests of 1.1250 failing focus returns to 1.1450 along with 1.00 USD holding.
• AUD: .7315 up 0.15% on the week and NZD .6635 up 0.70% - data, crosses and focus on China trade driving with .72 A$ and .6545 N$ key.
• CAD:1.3060 up 0.60% on the week with the CPI sufficient to keep BOC hiking and NAFTA hopes working – but 1.2990 and 1.3220 seem to hold and will be key

Commodities

The S&P/GSCI total return index fell 1.4% to 2,649.12 on the week. Hogs and Lumber led the winners with double digit gains on the week with grains' notable bounce on trade hopes with NAFTA and China. Worst performers were Platinum and Coffee.

• Oil: $65.91 off 2.55% on the week with Brent $71.83 off 1.35% on the week – focus is on 200-day m.a. near $63 and $66 as pivotal resistance for $68.50 again in WTI. Brent watching $70-$72.5 with US inventories and geopolitical issues dominating.
• Gold: $1184.25 off 2.83% on the week with focus on loss of safe-haven status and the break of $1204.60 opening $1120 risks. USD key along with US rates.Silver $14.80 off 4.35% on the week with $15.25 resistance now and $14.40 base. Palladium $914.50 off 2.6% with cars key while Platinum off 6.3% to $788.88 on the week.
• Corn: $378.75 up 1.8% on the week. Soybeans $892.75 up 3.6% on the week. Wheat $579.75 up 2.5% on the week – recovery on weather and trade hopes with USD retreat helping.
• Copper: $2.6560 off 4.75% on the week with Futures $2.6290 off 4.14% on the week. China main story along with equity pains globally but next week US housing sales will be next focus. Iron Ore $66.78 in September off 4.4% giving back all of last weeks gains on weaker China data.

 Calendar for the Week Ahead

A light week for news with Thursday the start of the Fed Jackson Hole Symposium and with the flash PMI reports being the big day.A scattering of Fed and ECB speeches, FOMC minutes, ECB minutes, RBA minutes and the Hungary central bank decision aren’t likely to move markets – but wording matters. US gets home sales and durable goods with focus on housing weakness and FOMC policy. Throw in Japan CPI and Canada retail sales and you round out the week for data.Expect focus to remain on Turkey headlines, Italy politics/budget and US/China trade talks

Monday, August 20: Fed, ECB and BOC speeches

• 0200 am German July PPI (m/m) 0.3%p 0.2%e (y/y) 3%p 3%e
• 0500 am Eurozone June Construction Output (m/m) 0.3%p 0.2%e (y/y) 1.8%p 1.6%e
• 0600 am German Bundesbank monthly
• 0815 am BOC Wilkins panel discussion in Frankfurt, Germany
• 1100 am Atlanta Fed Bostic fireside chat in Kingsport, TN

Tuesday, August 21: RBA speech and minutes, Hungary rate decision

• 0630 pm RBA Lowe speech ASIC in Canberra
• 0830 pm RBA board minutes
• 0200 am Swiss July trade surplus CHF2.591bn p
• 0430 am UK July PSNB GBP4.53bn p GBP2.3bn e
• 0540 am German 2Y Schatz auction
• 0600 am UK Aug CBI industrial trends 11p 9e
• 0800 am Hungary central bank rate decision – no change from 0.9% expected
• 0830 am US August Philadelphia Fed Service Index
• 0830 am Canada June wholesale trade (m/m) 1.2%p 0.8%e
• 0430 pm US weekly API oil stocks 3.66mb p 0.1mb e

Wednesday, August 22: US existing home sales, FOMC Minutes

• 0730 pm Australia July Westpac leading indicator 0%p 0.1%e
• 0830 pm Australia 2Q construction spending 0.2%p 1%e
• 1110 pm RBA Debelle speech
• 0540 am German 10Y Bund sale
• 0830 am Canada June retail sales (m/m) 2%p 0.3%e / ex autos 1.4%p 0.1%e
• 1000 am US July existing home sales -0.6%p +1.2%e / 5.38mn p 5.4mn e
• 1030 am US EIA crude oil stocks 6.805mb p 2.75mb e
• 0200 pm FOMC Minutes

Thursday, August 23: Jackson Hole Fed symposium starts, flash PMIs, ECB minutes, US new home sales

• 0730 am Japan Aug flash Manufacturing PMI 52.3p 52e
• 0100 am Japan June LEI 106.9p 105.2e
• 0245 am French Aug business climate 108p 108e
• 0300 am French Aug flash Manufacturing PMI 53.3p 53.2e/ Services 54.9p 55e / Composite 54.4p 54.6e
• 0315 am Swiss 2Q industrial production 8.1%p
• 0330 am German August flash Manufacturing PMI 56.9p 56.5e / Services 54.1p 54.3e / Composite 55p 55.1e
• 0300 am Sweden July unemployment 7.2%p 6.2%e
• 0400 am Eurozone August flash Manufacturing PMI 55.1p 55e / Services 54.2p 54.4e / Composite 54.3p 54.4e
• 0600 am UK Aug CBI retail trade 20%p 13%e
• 0730 am ECB meeting accounts
• 0830 am US weekly jobless claims 212k p 216k e
• 0900 am US June FHFA home price index 0.2%P 0.3%e
• 0945 am US August flash Manufacturing PMI 55.3p 55.1e / Services 56p 56.2e / Composite 55.7p 56.3e
• 1000 am US July new home sales -5.3%p +2.5%e / 0.631mn p 0.645mn e

Friday, August 24: Japan CPI, US durable goods, Jackson Hole Symposium speeches

• 0730 pm Japan July National CPI (y/y) 0.7%p 0.4%e / core 0.2%p 0.3%e
• 0200 am German 2Q GDP revised 0.5% q/q, 2.0% y/y
• 0830 am US July durable goods (m/m) 1%p -0.8%e / ex transport 0.5%p 0.4%e
• 1000 am Jackson Hole opening speeches

Conclusions: Is the US speeding up or slowing down? 

If value beats growth will it matter? Or is this all relative to rest the of the world? The last week did have some weak US data and the nowcasts from the regional Feds reflect this point.

The latest Atlanta Fed for 3Q is 4.3%, for the New York Fed its 2.4% down from 2.6% and for the St.Louis Fed its 3.693% from 3.412%.The balancing act for 3Q growth is inventories, ongoing consumer strength versus some dislocations of business both in Services and Manufacturing due to trade concerns.

This seems in contrast to the Philly Fed Manufacturing index last week which missed the mark and suggests production in the US maybe slowing as trade issues take their toll.

Anything over 2.5% GDP is seen as above the potential of the economy, although the surge in US productivity maybe important enough to shove outlooks for R* from 0-1% like the BOE to 0.5%-1.5%.The nominal growth in the US is going to be above 5% again in 3Q and that maybe the more important driver for rates, the USD and stocks.

There is a big debate about labor market productivity, demographics/immigration policy and the fiscal policy in the US that finds similar issues in Europe, the UK and parts of Asia. Growth post the 2008 crisis remains in doubt and sustaining it above average maybe more complicated than many central bankers want to believe as time and decisions won’t fix these ills. The present improvements in productivity are seen linked to the wage issues as companies higher less skilled workers and pay them less but train them more.At some point this won’t work, just when seems to be the key for markets and the Fed.