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Europe opens slightly higher, while Turkey downgrade weighs on the lira

While European markets closed lower for the third successive week on Friday, US markets continued to diverge with their highest weekly close since January on reports that this week’s China/US trade talks which are due to start on Wednesday, could well be the starting point to another meeting between President Trump and President Xi in November.

As an exercise in clutching at straws this is merely the latest example of the markets looking for a reason to ignore the possibility of any type of escalation in the current situation, where both countries have already slapped $50bn worth of tariffs on each other’s goods.

Nonetheless the prospect that any possible escalation may well be some way away has prompted some investors to tentatively step back into the market, though concerns about the situation in Turkey have kept European markets and investors much more cautious.

Friday’s downgrade of Turkey by S&P and Moody’s further into junk territory was largely expected by the markets, however it is also likely to prompt a similar downgrade to Turkey’s banks in the coming days, who are already struggling with the measures taken by Turkey’s authorities to support the lira. By making the currency more difficult to trade and limiting the ability of both domestic and overseas banks to hedge their currency exposure, the decline in the currency could well regain its pace in the coming days, after last week’s late rebound.

This week’s main focus, apart from the start of the latest round of China/US trade talks will be on the latest Fed minutes, but more importantly on the start of the Jackson Hole central bank annual symposium in Wyoming.

The rise in the US dollar to 14 month highs last week is prompting markets to ask some awkward questions about the Fed’s normalisation policy and could pose significant challenges for US policymakers in the coming months. The minutes aren’t expected to be too instructive when it comes to expectations about how US policymakers view the US economy. A September rate rise still seems a done deal given that US policymakers upgraded their outlook for the US economy earlier this month.

Powell’s speech though is likely to be analysed for clues as to whether the recent currency crisis in emerging markets, and notably Turkey, is causing anxiety amongst US policymakers.

Markets in Europe have opened slightly higher this morning on the back of Friday’s US strong finish, but they still remain at the lower end of their recent ranges.

Amongst the worst performers Sage Group shares have plunged on the open after being downgraded to “sell” by Deutsche Bank.

G4S shares are also lower after the company was stripped of control of Birmingham after it failed all of its test in its latest prison inspection.

It’s also a symbolic day for Greece as nearly ten years of financial assistance draws to a close. The implementation and end of a third bailout may well have drawn a line under a decade of political acrimony as well as economic misery, but for the Greek economy it is a mere footnote on a long and still arduous road whose destination remains far from certain.

The comments from European Commission Vice President Valdis Dombroskis that today “we celebrate the end of a long and difficult journey” are likely to ring very hollow and are in very poor taste when you consider the number of unemployed and huge amounts of debt the country is still carrying, and will carry for years to come. 

In M&A news US drinks giant Pepsico to buy Israel based Sodastream for $3.2bn as it looks to implement a strategy that increases its exposure in overseas markets, and broadening its exposure in markets where it has less traction. In an age where governments are implementing new taxes on high sugar drinks, it would appear that Pepsico is taking the opportunity to diversify its product line as well as targeting new markets at a time when consumers are becoming more health conscious and creating their own carbonated drinks. 

Tesla is also likely to remain in focus after Friday’s sharp selloff in the wake of CEO Elon Musk’s interview that the stress of the job was making it difficult for him to function properly. Coming as they did on the back of recent events about taking the company private, and other recent questionable tweets there are increasing concerns about Musk’s mental state and his ability to perform his role.

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