Intervention watch and other world market themes for the week ahead

The yen takes the market spotlight after the Bank of Japan intervened to buy yen for the

for the first time since 1998 as markets continue to watch for signs of escalating tensions between Russia and the West.

Election results from Italy, inflation figures in the euro area and data from the USA and China also give investors plenty to chew on.

Here’s a look at the markets for the week ahead:

DOLLARS WHEN?

Japanese authorities finally had enough of a weak yen and intervened to stem a sharp fall against the dollar.

But will it work? The runaway greenback is up more than 20% against the yen this year, and some doubt it has much left in the tank. But while US rates rise, Japan’s are stuck just below 0% and unlikely to budge.

So the case for a strong dollar remains. Japan, along with neighbors China and Korea also pushing back the dollar, could find itself battling fundamentals, the market and the Fed.

Traders in Seoul suspect authorities have already sold dollars, but the won continues to slide. Likewise, China’s yuan has hit fresh lows even as the central bank pushed back above the trading range. Friday’s China PMI data, if disappointing, could amplify the bear fall.

“NO BLUFF”

Russian President Vladimir Putin’s military mobilization order, threats to use nuclear weapons and a push to annex parts of Ukrainian territory mark a new phase in the seven-month-old conflict.

The announcements, which coincided with the diplomatic highlight of the year, the UN General Assembly, drew global condemnation and sparked fresh protests in Russia, where raft-age Russians traveled abroad to escape Moscow’s biggest conscription campaign since World War II.

The recent escalation has reflected in the markets: oil prices have risen sharply, raising the specter of more pain on the energy front for Europe. Meanwhile, European Union foreign ministers are preparing another package of sanctions – their eighth – that could be formalized in mid-October.

RED HOT

The ‘flash’ estimate of euro area consumer price data for September will be released on Friday and is expected to show inflation at a new record high above 9%.

Investors have already raised expectations for another 75 basis points, the ECB’s October rate hike, so the data should not change the near-term interest rate outlook.

Any sign of underlying price pressures expanding could further raise expectations of where rates end in the bloc. The ECB has become increasingly dovish in its rhetoric and some ECB observers say a mega 100 basis point rate hike cannot be ruled out in the coming months. That’s exactly what Sweden’s Riksbank just did, as did the Bank of Canada in July.

TESTING TIMES

Can the US consumer weather sizzling inflation and rising borrowing costs? Tuesday’s reading of consumer confidence will show how this key pillar of the economy is holding up.

Last month, the Conference Board’s consumer confidence index rallied to 103.2 overall, ending three straight monthly declines. The index is expected to come in at 104 this month, according to a Reuters poll.

On a positive note, data earlier this month showed that US retail sales unexpectedly rebounded in August as Americans accelerated car purchases and ate out more thanks to lower gasoline prices.

But with equity markets faltering and bond yields rising, it remains to be seen whether consumers remain optimistic – particularly given the Fed’s intention to lower inflation even at the expense of a sharp slowdown in growth.

NO DRAMA HERE?

When Italy last went to the polls in 2018, markets were rocked by anti-euro rhetoric from populist parties. Fast forward and there is little visible stress in the markets as Giorgia Meloni’s right-wing bloc looks set to gain a majority in both houses of Parliament in Sunday’s vote.

Your party, the Brothers of Italy, dates back to a post-fascist movement. But Meloni, the favorite to succeed Mario Draghi and Italy’s first female prime minister, has put on a pro-EU face – which has reassured investors.

Italy’s 10-year bond yield gap with Germany has widened from post-pandemic lows, but is a far cry from 2018 levels. Still, the extent of Meloni’s influence in parliament is being closely watched. Investors could welcome a solid majority that doesn’t reach the two-thirds needed for a constitutional amendment, which could lead to instability. How a new government will deal with an energy crisis that is pushing debt-ridden Italy into recession will also be under scrutiny.

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