The last week of July has a full schedule of first tier data releases and market events. These include the FOMC and BoJ meetings, the German IFO survey, Australian inflation data and GDP reports from both the USA and UK. In general, we believe the BoJ meeting will have more market impact than the FOMC meeting, the US GDP data could surprise to the upside and a weaker Aussie inflation report may not convince the RBA that an August rate cut is the appropriate course of action. 

However, we believe one of the most important data points for the week will be when the European Banking Authority stress tests are released after the NY close on Friday.

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The financial markets have recently focused on Italian banks and their swelling non-performing loan book but there is an acute risk that other Euro-Zone banks, including large German, Austrian and French banks, will need to raise capital as well. It’s worth noting that the MSCI European Bank Index lost almost 25% of it’s value after the UK referendum, including a 28% drop in the shares of Deutsche Bank.

From a FX point of view, the main significance is that the correlation between the MSCI EZ Bank Index and the EURO currency has grown. Market statistics show that the running 60-day correlation between the value of EUR and the Index now stands at a positive 50%. This is the strongest reading on the 60-day correlation since Q1 2014 and adds to the growing negative fundamentals for the single currency.


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