The week ahead: Robert Mueller, the unlikely saviour of global stocks?

Global financial markets had a weak finish last Friday as fears about global growth, led by a collapse in German PMI’s for March, triggered a bout of volatility, which saw US and European stocks tumble by 2%. As we start a new week there are two questions that investors must ask themselves: firstly, is the sell-off justified, secondly, is there anything that could happen this week to calm markets? 

Fed: the curse and the cure 

Looking at the question of justification for the sell off, the markets were spooked by a confluence of factors at the end of last week. Firstly, the Fed downgraded its US growth outlook and shifted to a dovish stance at its meeting last Wednesday, which began a period of soul-searching in the stock market. Secondly, German PMI suggested a contraction in Europe’s largest manufacturing sector. Thirdly, Brexit continues to hang in the balance casting a deep shadow over the UK economic future. 

If in doubt, follow bonds 

Keen market watchers would have noticed an element of panic setting in for bond investors in the middle of last week. US bond yields surged after last week’s Fed meeting, when the US central bank hinted that a further rate hike this year was unlikely. This saw US bond yields fall (prices rise), and culminated in the dreaded inversion of the US yield curve, when short-dated yields rise above longer-dated yields. This is considered to be an early warning signal that a recession is on the horizon. The surge in US Treasury yields, which also spread globally - German government bond yields turned negative at the end of last week, suggests that something is going on and real money investors (pension funds, insurance companies etc) are starting to feel uncomfortable enough to pile into low-yielding bonds and ditch the risky stuff. By the time this sentiment reached the stock market, traders headed to the exits all at once, which gave Friday’s trading conditions a panic-like feel. Will the weekend have given traders time to think and reassess their bearish stance? 

Central bankers to the rescue? 

It is worth remembering that global central banks stand ready to prop up the global economy, if needs be. The ECB and Bank of England have been clear on this point. The Federal Reserve has the biggest war chest of all the major central banks: it has plenty of room to cut interest rates and to buy more assets, thus stock traders are not alone out there, even if the economic climate turns chilly from here. 

Robert Mueller, the unlikely saviour of the US stock market 

The other factor that could brighten the outlook for stocks at the start of a new week, is the news about the Mueller Report, which was submitted to Congress on Sunday. Its main finding was that President Trump did not “conspire with Russia” during the 2016 election campaign. This gives President Trump the go-ahead to run for re-election in 2020, which may be stock positive as investors predict further tax cuts and perks from a second term for President Trump, especially compared to some of the left-leaning Democrat nominees. 

We think that the news on President Trump could boost risk sentiment, particularly in the US, at least in the short-term on Monday, as the market tries to claw back some of Friday’s sharp losses. However, the real test for markets will be the torrent of economic data that is due for release next week, along with the start of the first quarter earnings season later in April. If corporate earnings can beat expectations then we believe stocks can continue to do well, especially in the US. 

Gold becomes everyone’s favourite hedge 

Investors may still be wary, even if stocks recover on Monday, which is why we advocate watching gold. The yellow metal has had a strong six months, and we believe that it may continue its March gains, as the market starts to price in the prospect of inflationary support from the world’s major central banks, which is traditionally good for the gold price. $1,320 is a major hurdle to get over, ahead of $1,350 – a key resistance zone from April 2018. 

What next for Brexit 

FX is also worth watching closely this week. The UK is full of Brexit madness. Even though we won’t crash out of the EU at the end of this week three things are still possible: Cabinet coups against Theresa May, leadership challenges, and even another referendum (if Parliament gets its way). This week is set to see more debates about the type of Brexit Parliament would like, indicative votes (that could see no deal taken off the table, and even the possibility of another referendum), and, finally, a third meaningful vote on Theresa May’s original Brexit deal (albeit with some tweaks) by the end of the week. The pound doesn’t seem to mind. Fears of a cabinet coup did nothing to weigh on the pound at the start of this week. As we have said in the past, anything that delays Brexit for the long-term, or even better, reverses it completely, gives the pound a boost. The weekend’s People’s March, may have given global traders a reason to buy sterling at the start of the week, with GBP/USD back above $1.32, however, it is likely to meet stiff resistance at $1.3220, which could limit the upside in the very short term. Overall, we see GBP/USD range trading between $1.30 - $1.34, as we wait for the UK’s swan song from the EU to play out. 

Eur breaking my heart… 

The euro was our disappointment of the week, EUR/USD sunk below $1.13 at the end of last week as the USD staged a recovery on the back of safe haven flows. If global stock markets attempt to claw back some losses on Monday, which is what we expect, the we may expect the dollar to sink and the euro to try and reverse some of Friday’s losses, potentially back to $1.1380. If we get further selling pressure at this level, then the outlook for the euro darkens considerably for the medium term. 

Looking ahead, the fall-out from the Mueller Report, Brexit and Chinese manufacturing data are all highlights this week. It is also worth watching the bond market, if US yields continue to fall (prices rise) then we could be in for a rough ride as we move towards the end of the first quarter.