Take Five: Cruel summer

LONDON (Reuters) – Global markets are having a torrid time of late as U.S. recession fears creep back in and the effects of the yen’s sudden surge ripple out.

U.S. inflation numbers, the latest Japanese economic data and a slew of UK data could give investors a fresh steer.

Here’s your guide to the week ahead in financial markets from Ira Iosebashvili in New York, Rae Wee in Singapore and Dhara Ranasinghe, Samuel Indyk and Amanda Cooper in London.

1/ SUMMER CHILL, NO WAY

Investors should have learned by now that there’s no such thing as a “quiet” summer in markets.

A year ago, Treasury yields rose sharply on worries about the U.S. fiscal outlook. The summer before, inflation and rate hike fears jolted markets.

Monday’s meltdown saw Japan’s second-biggest stock crash and the largest ever intraday jump in Wall Street’s most-watched gauge of investor anxiety, the . That means the coming days will be tinged with nervousness, even if there are nascent signs of recovery.

Focus is on just how much more of an unwinding of so-called yen carry trades, seen as one reason behind the rout, is left and whether the pricing-in of aggressive U.S. rate cuts are justified by upcoming data.

And with concerns about a broader Middle East conflict and a U.S. election looming, volatility is unlikely to disappear soon.

2/ READY FOR MORE?

Investors are now bracing for Wednesday’s U.S. consumer price data for a read on how inflation is faring in the world’s largest economy amid recent signs that growth is wobbling.

Market hopes of an economic soft landing have been shaken by recent weak data, including news of a rapid down-shift in the jobs market. The slowdown fears have coalesced with the unwinding of a global carry trade to deliver markets a wallop.

Some analysts believe recession worries are premature.

Economists polled by Reuters expect both headline and core consumer prices rose 0.2% in July from a month earlier.

A number that shows only modest cooling could allay fears that the Federal Reserve has sent the economy into a tailspin by leaving rates elevated for too long. But a weak report could bolster recession worries, potentially sparking fresh market volatility.

3/ DISENCHANTMENT

    Japan reports preliminary second-quarter growth figures on Thursday, at a time where some analysts have critiqued the Bank of Japan’s (BOJ) recent rate hike as a policy misstep that triggered the brutal selloff in stocks.

To be sure, the connection isn’t quite so straightforward.

The BOJ’s hike sparked a resurgence in the yen and extended an unwinding of the hugely popular yen carry trade, which in turn sent investors de-leveraging and shedding their stock holdings to cut losses.

So should Thursday’s data point to a brighter outlook, Japanese policymakers can finally breathe a sigh of relief. A downside miss and they’d have to find more reasons to justify July’s hike.

    It’s yet another busy week in Asia-Pacific, with a New Zealand rate decision due on Wednesday, alongside a slew of data from China.

4/ DELICATE BALANCE

After July’s finely balanced decision to cut UK rates to 5.0%, the Bank of England will have a new set of data points to go through that might help determine what the coming few months look like for monetary policy.

Consumer inflation, including for the still-hot services sector, as well as second-quarter GDP and retail sales, are all in the mix.

Right now, markets expect rates to fall by a percentage point over the coming nine months.

But given how close July’s decision was, UK assets are likely to be extra sensitive to anything that might suggest the BoE has to deviate from that expected path. Sterling is looking fragile and UK equities have seen nothing but weekly outflows for four straight months, according to LSEG/Lipper data.

5/ EUROPE’S SILVER LINING

There’s a silver lining for European shares, down roughly 5% so far this month, and that’s corporate profits, with earnings set to grow for the first time in five quarters.

According to LSEG I/B/E/S data, Q2 earnings are expected to have increased 3.8% from the same period last year, the first quarterly rise since the first quarter of 2021. Almost 56% of companies have reported results that beat analyst estimates.

For sure, there are more tests ahead. Switzerland’s largest bank UBS reports earnings on Wednesday, while it’s a big week for the insurance sector, with Hannover Re, Aviva (LON:), NN (NASDAQ:) Group and Admiral set to report.

Overall, the Q2 earnings season suggests signs of a consumer slowdown, but strong growth in financials, energy and utilities

sectors have helped offset weakness elsewhere.

(Graphics by Prinz Magtulis, Pasit Kongkunakornul, Kripa Jayaram and Sumanta Sen; Compiled by Dhara Ranasinghe; Editing by Toby Chopra)