Weekly Fundamentals Overview July 22nd
The risk of volatility exists in the markets next week due to the G-20 meeting on Saturday the past weekend where weakness in the global economy was discussed as well the ways to carefully communicate changes in monetary policy. In addition to this, the Federal Reserve`s possible tapering of its stimulus program dominated the two-day talks in Moscow.
Even though central bankers and market participants admit that a certain reaction is inevitable, markets moved intensely with global yields surging and equities turning south after Fed Chairman Ben Bernanke signaled on June 19 the U.S. central bank may start tapering its monthly $ 80-billion bond- buying program this year. U.S. 10-year yields, which climbed 36 bps in June, have pared increases over the past two weeks as Bernanke eased those concerns in recent appearances where he stated that he will take a wait-and-see stance on monetary stimulus.
Bank of Canada Governor Poloz came to the defence of the U.S. Federal Reserve, stating that Chairman Bernanke`s plans of eventually tapering its bond buying program were carefully communicated. Poloz` s remarks about Fed tapering plans responded largely to complaints from emerging markets that Bernanke` s announcement had caused market volatility and capital outflows from their countries.
Secondly, according to the statement issued after finance ministers and central bankers met for two days of talks, the nations should move quickly toward market-based exchange rates and avoid any competitive devaluation. We reiterate that, the statement says, excessive volatility of financial flows and disorderly movements in exchange rates have adverse implications for economic and financial stability. The G-20 also expressed their support to the OECD`s plan for revamping global tax codes, which means both organizations will do what it takes to prevent the largest companies from using complicated ownership structures and transfer pricing policies to avoid paying taxes where they do most of their business. The economic data for Monday includes the following U.S. economic reports:
**12:30** Federal Reserve Bank of Chicago releases its Chicago Fed National Activity Index for June. The index read -0.3 in May;
**14:00** National Association of Realtors releases existing home sales for June
Additionally, Bank of Japan Board member Takehiro Sato speaks to business leaders in Fukushima, Northeastern Japan;
With respect to the expected tapering of Fed stimulus program, remember that every sign of an improving US economy means a shift in Fed policy is coming. The G-20 confirmed that the US and Japanese economies are strengthening, while growth slows in emerging markets and the euro area remains mired in recession. So, we will wait for confirmation that the economic growth in the U.S. has somewhat a stable path.