In some practical sense, even if not calendar-true, the week ahead is the last week of summer in the northern hemisphere. September could very well set the tone for the remainder of the year, but before we get there, the week ahead demands some attention.
Three drivers are evident:  the initial conditions of the markets, the data and geopolitics.  By initial conditions, we refer to the recent price action in the capital markets. Stock and bond markets remain firm.
The S&P 500 has recovered fully from the late-July through early August decline and has reached new record highs.  The major European bourses peaked earlier (UK in May, Germany, France, Italy and Spain in June), but have also been recovering over the last couple of weeks, though remain lower on the month.  The Nikkei’s multi-year high was recorded at the very end of last year, though the recent rally has brought it toward the five-month high set at the end of July.  MSCI’s emerging equity market index reached its highest level since August 2011 before the weekend.
Bond markets have also generally rallied.  Despite a string of strong US economic data and the prospect of more to come, the US 10-year Treasury yield struggles to rise above 2.40%-2.50%.  Germany’s 10-year bund yield is below 1.00%.  Even the peripheral European bond yields continue to make record lows.  Japan’s 10-year bond yield finished last week at 50 bp, while Switzerland’s was at 48 bp, which is about where the US 2-year yield finished.
While Germany pays nothing to pays nothing to borrow for 2-years, France pays 4 bp. The US borrows for six months at five basis points. Â EONIA has fallen to about half of a basis point, and there is nothing to stop it from going negative. On the other hand, the premium emerging markets pay over US Treasuries (EMBI+) is near the middle of the 280-320 bp four-month trading range.
After a poor start to the year, the US dollar has performed better recently.  The heavily European-weighted Dollar Index is at its highest level since last September.  On a trade-weighted basis, the dollar is near its best level since July 2013. If the decline in the euro has eased conditions in the euro area, as ECB President Draghi has suggested, the dollar’s appreciation has tighten US conditions, on the margin.
