The start of July and the summer heat wave comes between a week that is caught with the US Independence Day holiday and the World Cup. Most investors logically want to go home and cool off, the noisemakers are hard at work. In fact, July will be anything but a vacation for those watching geopolitics. The US President has meetings with NATO and European Union leaders as well as Russian President Vladimir Putin scheduled for July. We also get the longest lunar eclipse of the century and with the blood moon even more apocalyptic warnings. Throw in 2Q earnings and more China/US talks and you get the dog days of summer. Over the weekend, there were a number of key stories to unsettle markets:

• US-Saudi side deal to increase oil output. According to Trump, the world’s largest oil producer will inject up to 2 million barrels a day to world oil markets — a figure Saudi officials did not immediately verify. This comes after oil hits 3-year highs over $74bbl and US consumers face higher prices at the pump at the peak of driving season.
• Italy and France at odds over EU immigration deal. Confusion over the migrant deal has caused rifts to emerge between countries on the frontline of the migrant crisis and those without an external border. The proposal to build EU migrant centers has already prompted several countries, including France and Austria, to back away from participating in the arrangement. These remarks caused Mr. Conte to say that French President Emmanuel Macron was "tired" when he spoke about not setting up an asylum center.
• China Jun NBS Manufacturing PMI drops to 51.5 from 51.9 – weaker than 51.6 expected. The Service PMI 55 from 54.9 – as expected.  Slowing China economy fears continue wrapped around credit and US tariffs.
• AMLO expected to win in Mexico but violence rocked the election. The risk consulting group Etellekt said that more than 50 candidates have been killed since the beginning of campaigning last September, along with dozens of political workers. Obrador is ahead in the polls going into today’s vote – with 37%. There is no run-off election, and that means he is likely to beat the more conservative Ricardo Anaya of PAN and Jose Antonio Meade of current president Enrique Peña Nieto’s PRI, who have been polling below 20%. As well as a new president, Mexicans will be voting for 128 senators and 500 deputies in Congress as well as state and local officials. In all, 88 million people will be eligible to vote.

What these stories point out is the driving force of growth and confidence data and how central bankers react to them against the seemingly never-ending string of negative geopolitical headlines as populist politics and nationalism erode the faith in globalization and government institutions. The rise of Asia – particularly India and China – as world superpowers in terms of growth and economic importance describes the last 50 years and the present storm puts some of this into question but not all of it. The ability for the world to continue to lift up the people and add another 1 billion to the ranks of the middle-class rests on getting this moment right and some of that is seeing Europe return to growth, the US trade policy turn positive with real bilateral deals, and China stabilize with more reform, more confidence. The dog-days of summer are just that a few days of heat and stagnation, but they don’t last, like fear in markets, they pass.

Question for the Week Ahead:  Is US growth in 3Q going to reflect a hit to confidence?  The markets ended last week with an upbeat mood. This reflected hope that Trump would back down from extreme tit-for-tat tariffs – as the fear of a global conflict over trade turns real.  July 1 brings Canada tariffs, July 6 brings Trumps decision on China and likely retaliation.  The Friday rally also reflected hope that the worst case for Italy and Merkel were wrong and that the markets would see a longer summer.  Value in carry and EM remains a key hope for many that witness the significant pain in EM FX, stocks and bonds in 2Q.  The biggest issue for many investors is in the US outperformance in growth and so in the FOMC rate hiking to continue. This feedback loop of geopolitical fears to consumer confidence is essential to getting 3Q trading right.  The hit of US confidence in 2Q was minor and while many will make the slower personal spending an issue for 2Q growth – the rate is still well over 3.5% in most now casting models with some still over 5%.

The cost of energy in 3Q seems to be the big issue to watch as it bleeds into inflation and into how central bankers react. The US PCE/CPI are both over the FOMC target. If the jobs report in the week ahead proves to be strong the room for the FOMC to pause because the rest of the world is squeamish over US trade policy or because of political noise at home becomes less important. The risks for the week ahead revolve around the data, the way the FOMC reacts to it and the confidence of business and the consumer to put it all into perspective.

Market Recap: This was a week where month-end re-allocations and geopolitical worries dominated. The Trump trade policy led to selling of Asia and US shares, while immigration and trade fears hit Europe. China RRR cut and slowing growth led to the CNY dropping to 6-month lows and the equity markets suffering the most in 2 years – going into official “bear market” territory. The US data was mixed – US New home sales jumped in May, but housing prices softened. New durable goods orders fell 0.6% month-over-month in May, with core capital goods falling 0.2%, as orders were lower across the board. Growth in 1Q GDP was revised lower, from 2.2% to 2.0%, as small contributions from inventory growth and net exports were reduced. Personal income rose 0.4% in May and consumer spending rose 0.2%, both in line with estimates. The EU summit was key for the end of the week. Italy’s new prime minister, Giuseppe Conte, negotiated a package of measures at his first EU summit to stem the flow of migrants into the country. The member states agreed to increase border security, set up holding centers to handle asylum seekers, and speed up the decision to grant asylum or expulsion. EU data centered around the flash HICP rising to 2% while ECB loan growth rose to 9-year highs at 3.2% y/y. In Japan, unemployment fell to 1992 lows of 2.2% with job-to-applicant rations rising to 1.6.

Equities: The MSCI all-country World Index fell 1.28% on the week and -0.71% on the month while gaining 1.11% in 2Q overall. The MSCI EM index fell 1.72% on the week, fell 4.72% on the month and fell 9.73% in 2Q.

• US S&P500 fell 1.33% to 2,718.37 on the week and off 0.59% for June and up 2.93% in 2Q. The Monday price action was notably negative on trade concerns with DJIA breaking 200-day and S&P500 down the most in 3-months. Wednesday highs followed on Trump sounding less belligerent on China trade but this reversed into Thursday with energy the big winner and health care and consumer staples lagging.  DJIA fell 1.26% to 24,271.41 on the week, -1.48% for June and rose 0.70% for 2Q. The NASDAQ fell 2.37% to 7,510.30 on the week, fell 0.58% on the month and rose 6.33% in 2Q. The Cboe VIX closed at 16.09% up 16.85% on the week, up 19.54% on the month and down 19.43% in 2Q. 
• The Stoxx Europe 600 fell 1.32% to 379.93 on the week, off 1.8% on the month and up 2.44% in 2Q. Bank stocks were laggards for most of the week, though they recovered some lost ground by week’s end. The German DAX fell 2.18% to 12,306.00 on the week, off 3.29% on the month and up 1.73% in 2Q. The French CAC40 fell 1.19% to 5,323.53 on the week, off 2.6% on the month and up 3.02% in 2Q. The UK FTSE fell 0.59% to 7,636.93 on the week, off 0.84% on the month and up 8.22% in 2Q. The Italian FTSE MIB fell 1.2% to 21,626.27 on the week, off 2.19% on the month and 3.5% in 2Q.
• The MSCI Asia Pacific Index fell 1.92% to 166.04 on the week, off 3.48% on the month, and rose 3.89% in 2Q.  The Japan Nikkei 225 fell 0.94% to 22,304.51 on the week, rose 0.6% in June and gained 3.96% in 2Q. The Hong Kong Hang Seng fell 1.31% to 28,955.11 on the week, off 5.04% on the month and off 3.78% in 2Q. The China Shanghai Composite fell 1.47% to 2,847.42 on the week, off 7.41% in June and 10.14% in 2Q – back to bear market territory. The Australian ASX all Ords fell 0.51% to 6,289.70 on the week, up 3.04% on the month and up 7.17% in 2Q. The Korea Kospi fell 1.32% to 2,326.13 on the month, off 4.63% on the month and lost 4.89% in 2Q. The India S&P/CNX Nifty fell 0.99% to 10,714.30 on the week, rose 0.17% on the month and 5.94% in 2Q.

Fixed Income: The focus on equities and risk-aversion left bonds bid this week. The rise of energy prices and higher EU inflation was ignored as immigration and EU summit concerns mixed with US trade fears and China weakness to leave fixed income bull curve flattening. Focus is on growth and confidence with US outperformance put in doubt with spending revisions Friday. The geopolitical fears from trade hitting global growth continued to hurt in Asia and bleed to Europe with autos a key focus. The higher US inflation risks vs. more modest growth puts fears about policy mistakes higher.

• US Bonds see bull curve flattening despite supply and higher energy prices. For the week: 2Y off 1.3bps to 2.528%, 3Y off 2.9bps to 2.622%, 5Y off 2.9bps to 2.738%, 10Y off 3.5bps to 2.86%, 30Y off 4bps to 2.989%.
• Canadian 10-year bond yields rose 4.3bps to 2.163% on the week. Higher oil, mixed data and some still expecting BOC hike.
• Japan JGB bond yields flat at 0.03% on the week – with mixed auctions and the BOJ doing a bit less buying, the risk-aversion and month-end flows dominated.
• Australian 10-year bond yields fell 1.5bps to 2.63% on the week - dead week with focus on RBNZ and NZD moves, China trade and global moves. RBA on hold thinking remains.
• UK Gilt yields off 4.5bps to 1.275% on the week – despite better GDP revision, focus was on EU and global risk aversion – dovish sounds from BOE added to move.
• German Bund yields off 3.5bps to 0.30% on the week – The EU deal saves Merkel for now and relief Friday may return to drive yields higher but focus is on 0.25% vs. ECB and data next.
• French OAT yields fell 4.5bps to 0.66% on the week – with Macron looking vulnerable post EU summit – 0.6% key level.
• Italian BTP yields fell 1bps to 2.67% on the week – better end to week with Conte deal but worries about EU and budget and banks remain.  
• Spanish Bono yields fell 3bps to 1.315% on the week – watching Italy and France with data next week PMI key.
• Portugal 10-year bond yields off 4bps to 1.765% on the week – watching like Spain – waiting for more yield chasing.
• Greek 10-year bond yields fell 18bps to 3.90% on the week – extending rally on EU deal with 3.90% the key level still with 3.50% targets returning.

Foreign Exchange: The US dollar index rose 0.3% to 94.47 on the week, up 0.4% on the month and up 5% in the 2Q. USD gains reflect US rates and EU political/Asia trade concerns. EM was a key loser.  In EM FX – USD mixed for the week with TRY, RUB, MXN winners but CNY, ZAR notable losers but in 2Q, USD had no competition. LATAM: MXN up 0.5% to 19.909 on the week, but off 0.4% on the month. BRL off 2.45% to 3.8760 on the week, off 4% on the month; ASIA: CNY off 1.8% to 6.6170 on the week, off 3.2% on the month and 5% in 2Q, KRW off 0.4% to 1113.40 on the week, off 2.8% on the month, INR off 0.85% to 68.45 on the week and 0.9% on the month and 5.2% in 2Q; EMEA: RUB up 0.2% to 62.785 on the week and -0.1% on month, ZAR up 2.25% to 13.722 on the week and off 8% on the month, TRY up 4.3% to 4.586 on the week. Crypto Currencies: BTC $6,335 off 4% on the week, ETH $449 up 2% on the week.

• EUR: 1.1685 up 0.25% on the week with the key for the week being EU deal and 1.1610 the pivot for 1.1720-40 resistance again. Notable, EUR is off 5% in 2Q.
• JPY: 110.65 up 0.65% on the week and up 4% in 2Q and EUR/JPY 129.35 up 0.95% on the week. 110 back to pivot with 111 barrier and 112.50 targets with risk-key driver.
• GBP: 1.3205 off 0.4% on the week, off 0.3% on the month, -5.8% in 2Q and EUR/GBP .8845 up 0.7% on the week and up 0.8% in 2Q overall.
• CHF: .9905 up 0.25% on the week with $ up 3.5% in 2Q and EUR/CHF 1.1570 off 0.4% - as EU fears drop. USD stuck .98-1.00.
• CAD: 1.3135 off 1% on the week but up 0.9% on the month. The C$ remains over 1.30 but 1.32 didn’t hold and BOC hike risk isn’t zero with oil helping.
• AUD: .7400 off 0.5% on the week, off 1.4% on the month – crosses and metals hurting- and NZD .6765 off 2% on the week and 1.9% on the month – RBNZ dovish enough, data weaker.

Commodities: The S&P/GSCI total return index rose 3.42% to 2,821.65 on the week, 1.36% on the month and 8% in 2Q. Oil biggest winner on week and month while Soybeans fell the most – reflecting sanctions on Iran and US/China trade wars.

• Oil: $74.15 up 8.1% on the week, up 11% on month (Aug). OPEC and Iran sanctions dominated along with bigger US draws. Brent up 5.2% to $79.23 on the week and 5.3% on the month. Focus is on $75 in WTI and $80 in Brent next.
• Gold: $1251.40 off 1.4% on the week, off 3.65% on the month. Silver off 2.16% to $16.104 on the week. Platinum off 2.39% to $852.40 on the week. Palladium up 0.5% to $950.90 on the week.
• Corn: $350 off 1.95% on the week, off 12.45% on the month. Wheat rose 1.27% to $4.9740 (July). Soybeans fell 4% to $858.40 on the week and 16.7% on the month.
• Copper: $2.9990 off 2.7% on the week (cash), $2.9510 off 3.64% on the month.  Iron Ore rose 2.49% to $64.32 (Aug).

Calendar for the Week Ahead: The week starts with Japan Tankan and Manufacturing PMIs, continues with the RBA and Riksbank decisions, coupled with Eurozone retail sales and US auto sales, then has the Wednesday US holiday but rest of the world Service PMI and composites, then we see US ADP, Service ISM and FOMC Minutes, with Friday brining the US jobs and trade along with Canada.  Busy enough given the Mexico election results Monday and the Trump tweets likely throughout about trade and his upcoming NATA and Russia meetings.

Monday, July 2: Canada Day holiday, Japan Tankan, Global PMIs

• 0750 pm Japan 2Q Tankan Large Manufacturing 23p 23e / Service 20p 22e / All Capex 2.3%p 9.3%e
• 0830 pm Japan June Nikkei final Manufacturing PMI 53.1p 52.8e
• 0945 pm China June Manufacturing PMI 51.1p 51.0e
• 0315 am Spain June Manufacturing PMI 53.4p 53.6e
• 0345 am Italy June Manufacturing PMI 52.7p 52.7e
• 0350 am France June final Manufacturing PMI 54.4p 53.1e
• 0355 am German June final Manufacturing PMI 56.9p 55.9e
• 0400 am Eurozone June final Manufacturing PMI 55.5p 55e
• 0430 am UK June Manufacturing PMI 55.4p 53.7e
• 0500 am Eurozone May unemployment 8.5%p 8.5%e
• 0500 am Eurozone May PPI (m/m) 0%p 0.3%e (y/y) 2.0%p 2.4%e
• 0945 am US June Markit Manufacturing PMI 54.6p 55.0e
• 1000 am US June ISM Manufacturing PMI 58.7p 58.0e
• 1000 am US May Construction Spending (m/m) 1.8%p 0.5%e

Tuesday, July 3: RBA, Riksbank, Eurozone retail sales, US factory orders, total auto sales.

• 1230 am RBA interest rate decision – no change from 1.5% expected.
• 0300 am Spain June unemployment change -83.7k p -101k e
• 0300 am Sweden Riksbank rate decision – no change from -0.5% expected.
• 0430 am UK June PMI Construction 52.5p 52.3e
• 0500 am Eurozone May retail sales (m/m) 0.1%p 0.2%e (y/y) 1.7%p 1.6%e
• 0930 am Canada June Markit Manufacturing PMI 56.2p
• 1000 am US May Factory Orders (m/m) -0.8%p -0.1%e
• 0330 pm US June total vehicle sales 16.91mn p 17.00 mn e

Wednesday, July 4: US Independence Day, Global Service PMI

• 0830 pm Japan June Service PMI 51.0p 51.6e
• 0930 pm Australia May retail sales (m/m) 0.4%p 0.3%e
• 0930 pm Australia May trade surplus 0.97bn p 1.2bn e
• 0945 pm China June Caixin Service PMI 52.9p 52.7e
• 0315 am Spain June Service PMI 56.4p 56.5e
• 0345 am Italy June Service PMI 53.1p 53.3e
• 0350 am France June Service PMI 56.4p 56.4e / Composite 54.2p 55.6e
• 0355 am German June Service PMI 52.1p 53.9e / Composite 53.4p 54.2e
• 0400 am Eurozone June Service PMI 53.8p 55e / Composite 54.1p 54.8e
• 0430 am UK June Service PMI 54p 54.2e

Thursday, July 5: German factory orders, US ADP, Service ISM, FOMC minutes

• 0200 am German May factory orders (m/m) -2.5%p +1.0% e
• 0300 am Spain May Industrial output (y/y) 1.9%p
• 0315 am Swiss June CPI (m/m) 0.4%p -0.1%e (y/y) 1.0%p 1.1%e
• 0440 am Spain sells 5-10Y bonds
• 0500 am France sell 10Y OATs
• 0600 am BOE Carney speech
• 0715 am ECB Weidmann speech
• 0815 am US June ADP employment change 178k p 180k e
• 0830 am US weekly jobless claims 227k p 225k e
• 0945 am US June Markit Service PMI 56.8p 56.6e / Composite 56.6p 56e
• 1000 am US June ISM Service PMI 58.6p 58.2e
• 1000 am US July IBD/TIPP economic optimism 53.9p 54.2e
• 1100 am US weekly EIA oil inventories -9.89mb p -8.3mb e
• 0200 pm US FOMC minutes

Friday, July 6: German IP, US jobs and trade, Canada jobs and trade

• 0730 pm Japan May household spending (y/y) -1.3%p -1.5%e
• 0800 pm Japan May labor earnings (y/y) 0.8%p 0.2%e
• 0100 am Japan May LEI 106.2p 106.0e
• 0200 am German May Industrial Production (m/m) -1%p 0.3%e
• 0245 am French May C/A deficit E1.1bn p / Trade E4.95bn p -5bn e
• 0400 am Italy May retail sales (m/m) -0.7%p -0.5%e
• 0830 am US June Non-Farm Payrolls 223k p 190k e / unemployment rate 3.8%p 3.8%e / average earnings 0.3%p 0.3%e / Participation rate 62.7%p
• 0830 am US May trade deficit $46.2b p $47.0b e
• 0830 am Canada May trade deficit C$1.9bn p C$3.6bn e
• 0830 am Canada June unemployment 5.8%p 5.8%e / jobs -7.5k p 17.5k e
• 1000 am Canada June Ivey PMI 62.5p 63.8e

Conclusions: What are the real chances for trouble in 3Q?  If you sold in May and went away you still aren’t sure you have made the right decision. Risk remains mixed and the stories that supported the market from March have held except in emerging markets. The key for the 3Q will be about the return of carry, the drop in volatility and the ability for contagion fears to be replaced with idiosyncratic ones.  The trouble in the US wraps around what happens in the mid-terms and how that effects businesses and their growth plans.  The 3Q will set the tone for the vote and its growth and confidence are going to be key for keeping markets together.  The business conditions for 3Q look fine and that maybe the best point to put for July – that so far nothing terrible has really happened and so we are likely to see a sense of stoic calm lead to investors returning to climbing a wall of worry after a rather miserable last week.