FX Weekly Insights — August 2
Key Events
August 2nd – (US) ISM Manufacturing PMI (July)
August 3rd – (AU) RBA Interest Rate Decision & Rate Statement
August 3rd - (AU) Employment Change & Unemployment Rate for Q2
August 4th – (AU) Retail Sales (MoM) (June)
August 4th – (EU) Retail Sales (YoY) (June)
August 4th – (US) ADP Employment Change (July)
August 5th – (UK) BOE Interest Rate Decision, Minutes Report & Governor Baily Speech
August 5th – (AU) RBA’s Governor Lowe Speech
August 6th – (US) Non-Farm Payrolls (YoY) (July)
August 6th – (CAD) Net Change in Employment & Unemployment Rate (July)
August 7th – China Trade Data (July)
RUB Weekly Outlook: Recent RUB strength has been off the back of thin liquidity, moderate inflow of bonds and models. A rally in oil and stable EM peers were also supportive factors of course. In focus this week would be global sentiment, oil price, and most of the EU and US data. There are some short-term stops are placed under 72.70 and we see the top of the range at 74.00.
Key Stories
Surge in Global House Prices caused by the Pandemic, the worst in two decades
The surge in house prices in most OECD countries amid the Covid19 pandemic are reigniting concerns about financial stability. The trend is fuelled by low interest rates, accumulated savings, and desires for bigger spaces to work from home. This has led to overcrowding property markets, and the situation is amplified by the lack of supply and increasing construction costs as global supply chains of construction materials – timber, copper or steel - are put under pressure.
Housing prices are now growing faster than incomes or rents. The persistence of housing price booms can quickly become unsustainable if they are accompanied by strong credit expansion. According to the OECD, house price growth has reached 9.4% during the first quarter of 2021, which is the fastest growth pace in 30 years. However, disruption in global supply chains may be temporary, due to delays at ports worldwide. Also, credit growth is also lower than it was in 2007, therefore there may be a lower risk of a crash. Furthermore, there is a heightened awareness of the risk that housing prices represent, meaning that central banks are being more vigilant than before.
However, with increasing inflationary risks, there is a possibility that credit continues to increase, and for people to default on their mortgage as they are unable to keep up with increasing prices. Even though countries are opening their economies back up, the pandemic has put a significant strain on a large proportion of the populations’ income, with disposable income remaining fragile faced with inflation. It is therefore important to take into consideration the larger socioeconomic context in order to understand and track the evolution of housing prices, and the deeper risks they might represent for the global economy.
Chinese Government Crackdown on Education and Tech Companies Increases Risk for Foreign Investors
China has cracked down on education companies in the private tutoring industry such as TAL Education, New Oriental Education or Gaotu Techedu, by banning them from making profits, raising capital, listing on stock exchanges worldwide, or accepting foreign investment, as profit incentives for private tutoring companies are believed to have consequences on socioeconomic inequality. This comes after anti-monopoly and data security measures taken by the government against large Chinese tech companies. The regulatory shocks have caused a shock in education stocks with the three companies listed above falling close to 60% in the first hour of trading on July 23rd, and tech giants Tencent and Alibaba falling 18% and 14 % respectively, marking the worst month for tech companies since the financial crisis in 2008.
These regulatory shocks have caused strong concerns amongst investors and shareholders, and increased risk for foreign investors. They have experienced large losses and become anxious about what other sectors will be targeted by government regulation. Investors have sold off these stocks en masse, leading large-scale revision of investment strategy in Chinese stocks. Beijing has since attempted to reassure Wall Street that similar regulation will not reach other sectors, but foreign investors remain unconvinced.
Chart of the Week – EUR/ USD
Please note this will be our last FX Weekly Insights for the summer break and we will return in September.