Developed macro
1. Market is likely to start with ‘risk-off mode’ following the downgrade of S&P
2. The ECB hints that it is ready to buy more bonds in markets
3. The G7 agreed to take actions to stabilize markets and inject liquidity if needed
4. Japan’s current account surplus widened in June.
Interest rate strategy
1. Euro sentiment remains overriding influence on rates, with Euro core support still in place
2. Italian BOT auction and ECB’s open market operations will be watched
3. FOMC and Treasury auctions also influential for US rates
FX strategy
1. EUR to benefit from ECB’s more activist bond buying programme, but the scale of the impact on EUR will hinge on the scale of the ECB’s intervention.
2. USD to be on backfoot given the downgrade and ECB activism.
3. CHF likely to come under downward pressures, as will JPY, but they will retain their safe haven allure as there remains plenty to worry about.
4. GBP will tread water ahead of the Quarterly Inflation Report later this week.
Emerging markets
1. We see muted reaction in Asian EMs to US credit rating downgrade, except in equity markets, which are likely to fall.
2. EM FX to do well if supported by current account surpluses. In the long run, CBs will likely accept faster appreciation.
3. EM bonds issued by countries with stronger fundamentals to outperform on FX reserve diversification.
Commodity markets
1. Debt and growth worries buoy gold and silver…
2. Base metals: Buying opportunities are emerging…
3. …Copper and aluminium are our preferred base metal exposures.
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