Despite ongoing trade war concerns, none of which were eased at the G7 meeting, as Trump threatened not to sign the joint communique, the S&P 500 finished the week up by 1.6%. He certainly knows how to stir things up no matter where he goes. The possibility of some form of trade war could still weigh on equity prices as it is one of the real possible threats to the current optimism surrounding economic growth. The Vix index fell on the week suggesting that currently, investors remain confident that a full-scale war will not surface. One could also take the view that should these concerns become greater, central bankers around the globe may be less inclined to reduce monetary stimulus.
The other topic that has been at the forefront of investor caution has been the concerns regarding the state of the Italian Government and its possible desire to confront the euro area with its intended stimulus measures. Despite the immediate threat of another election having rescinded, Italian bonds remain out of favour with investors, as the ten-year yield has climbed back to the levels it was at the height of the concerns. Two of the wall of worry bricks remain in place.
The week ahead will be dominated by the Federal Reserve’s meeting on Wednesday when they are expected to raise interest rates by the second time this year. Along with the decision will be Federal Open Market Committee's economic projections and a press conference. Ahead of the announcement on Wednesday will be the latest US inflation data. Should the Fed be committed to the next interest rate move its unlikely any inflationary changes will alter that view.
It is a busy week for central bankers as the ECB meets on Thursday to announce their latest interest rate decision. Unlike the Federal Reserve, there is no expectation that the ECB will change monetary stance. What may be of more interest will be the accompanying statement and Mario Draghi’s press conference. Will the latest Italian concerns encourage the ECB to become more dovish? One would imagine both central bank chairmen will be quizzed on their concerns for a trade war.
As for the UK, we get the latest inflation data on Wednesday and average earnings on Tuesday along with the latest unemployment rate. After the recent weakness in economic data, the Bank of England has pulled back on raising interest rates so far this year. Any of the above data could change interest rate sentiment. The recent rise in the oil price may kick back into the inflation data.