Top 4 things to know at the start of a new trading week
As we enter a new trading week, here are the top 5 things to watch out for, as financial markets attempt to make sense of last week’s spike in volatility and the sharp stock market sell-off.
1, US and China trade talks back on
After a long hiatus, American and Chinese trade delegates will finally meet in Washington on Thursday and Friday this week. Since the direct value of US/China trade in goods and services is worth nearly $800bn, not including the indirect value, a lot is resting on these talks. Will the two sides agree a trade deal that has so far evaded them? Will the two sides agree to anything? Or will the talks dissolve into animosity triggering another wave of trade tariffs from both sides?
These are big questions, and the market could be in wait-and-see mode at the start of the week, as the outcome of these talks is the biggest near-term driver of global stock markets. President Trump delayed a planned 5% increase in Chinese imports as a goodwill gesture ahead of the 70thanniversary of the founding of the Chinese Republic at the start of this month, will this have improved relations between the two sides? In these extremely jittery markets, anything less than a positive outcome could be met with a wave of risk aversion and another stock market sell-off. On the other hand, if the US and Chinese agree a trade deal, and let bygones be bygones, then expect global stock markets and risk sensitive assets to soar. In contrast, we would expect safe havens such as gold, the yen and Treasury prices to fall sharply. Since yields move inversely to price, then we may see Treasury yields surge to multi-month highs and investors rush to price out the prospect of a rate cut by the Federal Reserve at the end of the month, which may be positive for the dollar at the end of this week.
2, Second-guessing the Fed
FOMC minutes are scheduled for release on Wednesday and a speech by FOMC Chair Jerome Powell on Tuesday, may give us critical insights into the next steps by the Federal Reserve. The FOMC minutes are particularly interesting because there were three dissenters at last month’s meeting when the Fed cut interest rates by 25bp (one wanted a larger cut, and two wanted no cut). The market is currently pricing in a 76.4% probability of a 25 bp rate cut at the next meeting on October 30th, which is up from a 59% chance of a cut 1 month ago. While we expect the minutes from the last Fed meeting to suggest that there is some caution around another cut this month, Jerome Powell’s speech on Wednesday night could be more interesting. US manufacturing and non-manufacturing data slumped last month, which is a pattern being repeated around the world. Although the unemployment rate sunk to a 50-year low in September, the rate of job growth in slowing sharply. Thus, could Jerome Powell be more supportive of a rate cut during this speech? If so, expect stocks to surge.
3, Evaluating the world economy
German factory orders, UK retail sales, European trade data, US CPI, UK manufacturing production data and European inflation data will be closely watched this week. Inflation data is particularly critical. US CPI is expected to tick up slightly to 1.8%, while prices excluding food and energy are expected to remain at 2.4%. This is a fairly healthy rate for US inflation, which suggests that the US economy is doing better than last week’s survey data suggests. If expectations for US CPI are correct, then it may not suggest that another rate cut from the Fed is necessary. Will this data embolden the hawks on the Federal Reserve? A stronger than expected reading for US inflation next Thursday could trigger a stronger dollar and a slight decline in stock markets, as it may have the power to move the dial on US rate expectations.
4, What next for Brexit?
The clock is ticking towards the UK’s self-imposed Brexit deadline at the end of this month. The Prime Minister’s blueprint for a new deal with the EU has not been met with much enthusiasm, and EU negotiators refused to meet with the UK for talks this weekend. However, that does not mean that the deal is unsalvageable. The Germans are still gunning for a deal to ensure no disruption to trade between the EU and the UK, also, if the EU refuses to accept this deal, or to enter into further negotiations with the UK, then it will be blamed for the only other option left on the table: a no-deal Brexit. At this stage of the saga, we don’t expect either side to let their position be known, however, we would not be surprised if there is a “breakthrough” in negotiations at some stage this week or next, before the next European Council summit on 17-18thOctober. GBP managed to claw back some of last week’s losses on Friday and has remained in a fairly tight range considering how close we are to the Brexit deadline, GBP/USD has traded between $1.22 and $1.24 during the last week.
The options market suggests that traders are positioning themselves for some big moves around the Brexit deadline, which is unsurprising. Is the fact that the spot market is moving at a slower pace a sign of a latent optimism in the FX market that a Brexit deal will be done before the October 31stdeadline? Or is this mini “recovery” in the pound a reaction to the very bad week for the FTSE 100 (which tends to move inversely to sterling?). Or is it a sign of trader fatigue with selling the pound? This week is likely to bring more twists and turns in the Brexit saga, however, we believe that the pound may react in a stronger way to positive Brexit news than to negative news flow now that PM Boris has brought a new deal to the table. There is also a chance that GBP/USD may continue to trade in the $1.22-$.24 tight range ahead of the EU Council meeting the week after next. Thus, we could see GBP/USD test the $1.24 zone in the coming days, although a move beyond this level seems like a stretch too far at this stage.