LONDON (Reuters) - 1. READY FOR A SCARY EURO ZONE GDP SHOW?
Fears of a major downturn in euro zone powerhouse Germany grew this week following "scary" industrial output figures for June and reports due over the coming week that will hold those concerns up to the light.
On Wednesday, quarterly flash gross domestic product data for both Germany and the wider euro zone is released. The consensus forecast from Reuters' poll is the euro zone GDP grew 0.2% in the second quarter but in Germany - the bloc's largest economy - it's expected to have shrunk 0.1%.
Bond markets certainly fear the worst. Ten-year bunds yield a record low of almost -0.60%. The entire German government yield curve out to 30 years is now below zero. Investors are raising red flags about a euro zone recession and a resumption of European Central Bank bond buying as the escalating U.S.-China trade war hit the exporters.
Markets are on high alert for signs Germany and other governments will use such cheap borrowing rates to support the reflation policies of their central banks. A report this week that Germany might issue new debt to finance climate protection caused a brief spike higher in bund yields and the euro.
Graphic: German industrial production https://tmsnrt.rs/2MOZWTV
2. U.S. ECONOMY READ OUT
After an escalation of the U.S.-China trade row sparked one of the most volatile weeks of the year for U.S. stock and bond markets, investors are focusing on the U.S. economy's ability to absorb a tariff war with some critical health checks on Thursday.
Already, alarm bells are ringing: U.S. 30-year yields are flirting with record lows, and the premium on three-month Treasury bill rates over 10-year Treasury yields - a closely watched U.S. recession indicator - jumped to its highest since March 2007. Some analysts now see a more than 50% chance the longest-ever U.S. economic expansion could slip into a recession within 12 months. PIMCO, one of the world's biggest bond investors, talked of the possibility of negative Treasury yields.
U.S. July consumer price inflation, due Tuesday, has been tame in recent years and consistently below the Federal Reserve's 2% target. Fed chair Jerome Powell said the strong tie between unemployment and inflation was broken 20 years ago and the relationship "has become weaker and weaker and weaker."
But market watchers are in for deluge of data on Thursday: July retail sales, industrial production, the August Philadelphia Fed index and NAHB housing market indicator are coming. So are weekly jobless numbers and the June TIC data update on the breakdown of Treasury holdings
A quarter-point cut at the Fed's next meeting on Sept. 18 is now almost fully priced. Markets see one chance in four of a larger 50-basis-point rate cut next month.
Graphic: U.S. Inflationary Pressures Moderating https://tmsnrt.rs/2YAyoIY
3. SMALL MOVE, BIG DEAL
What seemed like a minor lurch in China's currency has become a big deal for financial markets. Many fear it may be the beginning of a Chinese competitive devaluation in response to U.S. tariff threats, which in turn could trigger a currency war that may force other regional central banks to slash interest rates. The move also sparked fresh doubts a deal in the U.S.-Sino trade war will ever get done.
That 2-plus-something percent slide in the heavily managed yuan has pushed it to 2008 lows and to the weaker side of 7 per dollar. Beijing is saying it's merely letting market forces drive the yuan, not weaponising the currency, and has done its best through open market operations to contain the move.
Chinese trade data showed that, with falling imports and exports, Beijing needs a weaker currency to support its economy.
Yet the yuan's drop has set in motion scarier prospects: more geopolitical and business ruptures and threats between the world's two biggest economies. That is being borne out in plunging stocks and bond yields, tumbling emerging-market currencies and a flight to the safety of dollars, gold, bitcoin and yen.
Markets are watching the back and forth between Washington and Beijing, accusations of currency manipulation, plus the mounting pressure on the Fed to cut rates again. In addition, there is the question of how Beijing will manage expectations around its currency so it doesn’t spark a flight of domestic and foreign capital.
Graphic: China's yuan breaks below 7 https://tmsnrt.rs/2Yyp3Bw
4. IT'S GETTING FROTHY DOWN THE LONG END
The markets rout after an escalation in the U.S.-China trade war marked new milestones for many assets, and government bonds were no exception.
As investors piled into safe-haven assets, Germany's 30-year bond yield hit a record low, Ireland's 10-year bond yield turned negative, and the Netherlands became the latest to join that growing club of countries with entire yield curves drowning in sub-zero territory.
The evaporation of global yield is pushing investors further out the maturity spectrum. Austria's 100-year bond is up some 63% year-to-date, with a vertical price chart harking back to similar surges in cryptocurrencies and tech stocks.
Austria's century bond only highlights a broader trend: the yield on the Bloomberg Barclays Multiverse index for global bonds with maturities of seven to 10 years hit a record low of 1.44% this week.
Going "long" U.S. Treasuries has featured as what fund managers think is the "most-crowded trade" for two months straight in a Bank of America Merrill Lynch survey. That could prove a bad omen - assets named "most crowded" usually sink soon afterwards. Time for a bubble to pop?
Graphic: Austria's long-dated debt rallies https://tmsnrt.rs/2ML8FXh
5. THE VOTE'S OUT ON MACRI-NOMICS
Argentina goes to the polls for primary elections on Sunday in what is seen as a dress rehearsal for October's national ballot and a giant referendum on the austerity politics of center-right incumbent President Mauricio Macri.
Voters will choose among 10 presidential candidates, but the main political parties have already established theirs, so the primaries, known as the PASO, should reveal whether the strait-laced Macri has any serious hope of catching his main rival, the moderate Peronist Alberto Fernandez.
Fernandez, whose running mate is populist ex-leader Cristina Fernandez de Kirchner, has tapped into the public's anger at the economic pain austerity has inflicted. But markets are worried they could start blowing the budget again and endanger the IMF support which is more or less the only thing keeping the country afloat.
It means a fairly close result on Sunday is likely to trigger a rally in Argentina's currency and bond markets. A big Fernandez showing could do the opposite. It's a big moment for investors who are still overweight Argentine assets.
Graphic: Argentina's IMF lifelines https://tmsnrt.rs/2MOSOqE
(Reporting by Vidya Ranganathan in Singapore, Jennifer Ablan in New York, Tommy Wilkes, Marc Jones and Ritvik Carvalho in London; compiled by Karin Strohecker; editing by Larry King)