Why you shouldn’t over-analyse the G20, the data deluge and other thoughts for the week ahead

The initial focus for the week ahead is likely to be the trade truce between the US and China that was announced at the weekend’s G20 meeting. That means, for now, no more trade tariffs and a resumption of talks between the two sides. However, it’s worth noting that there is still no trade deal, and President Trump remains firm that he wants to level the playing field when it comes to trade between the US and China. While the news headlines post the G20 have tended to be on the negative side, will the markets react in the same way?

The winners from the trade truce 

We believe that investors will take heart that the G20 has brought a pause in the trade war between the two sides, and global stock markets may rally as a result. Sectors that are likely to be particularly sensitive to this news include global exporters such as German car firms, and the Dax may be a top performer in Europe at the start of this week. We also expect Asian stocks to also perform well. 

Huawei, and its supply chain, to benefit from G20 

The outcome of the G20 may also benefit Huawei, the Chinese telecoms giant, which has been publicly excluded from certain telecoms contracts in the US and parts of Europe because of the fallout between the US and China over trade. The clash between the US and Huawei has had far-reaching consequences. Telecoms companies in Europe and the UK that do business with the US or want to do business with the US, have faced fast-accelerating political risk. If this risk is perceived as being reduced post this G20, then we could see telecoms giants such as Vodafone, Erikson and Nokia benefit at the start of this week. Another beneficiary could be European semiconductor  makers that supply Huawei; they may see their share prices rise as a result of the outcome of the G20, which may be good news for Infineon Technologies and AMS, which had to make adaptions to their supply chains in order to supply Huawei after the fallout with the US. 

When fundamentals take centre stage 

Overall, financial markets like it when global supply chains are uninhibited, thus, we believe that the first part of this week could see an upbeat tone to financial markets. The second part of this week is likely to be dominated by a flurry of start-of-the-month economic data including the all-important US jobs report, which is released on Friday. It is worth noting that US Independence Day on Thursday may cause some reduced liquidity in major US indices as we move towards the end of the week, which could trigger some volatility around key economic releases. 

Will the Fed really cut rates? 

The data prints worth noting include the US manufacturing and non-manufacturing ISM reports on Monday and Wednesday, the ADP private sector payrolls report released on Wednesday and, of course, the Non-Farm payrolls report and wage data that will be released on Friday. After a slew of better economic data out of the US last week, including higher PCE and personal consumption data, the market will view this data on the basis of what it means for the Federal Reserve meeting later this month. Currently, a rate cut is fully priced in by the market, there is a 70% chance of a 25-basis point rate cut and a 30% chance of a 50-basis rate cut, according to the CME Fedwatch tool. Considering rates have not been cut in the US for a decade, financial markets are expecting a ballsy move from the Federal Reserve.  

Once all of this week’s important data points are released, the market needs to assess whether these expectations for the Federal Reserve meeting are correct. Although economic data has disappointed to the down side for most of this year, US stock markets have had a stunning rally. The S&P 500 is up more than 17% year-to-date, while the Dow Jones has also rallied 14% so far this year. This suggests that risky assets have defied the odds in the face of plenty of geopolitical and economic risk, including the Trump/ China trade spat and Iran’s attacks on oil tankers. Will the Fed really cut rates when the stock market is doing this well? We believe that several weak data releases this week and a second month of disappointing payrolls is likely to increase the odds of a Fed rate cut even more, while good data prints, combined with a strong payrolls report may see expectations for a rate cut fall and stock markets sell-off. If we get an unexpected payrolls number, either on the upside or the downside, then we expect some large market moves, especially since half of Wall Street may still be on holiday on Friday. Wednesday’s note will update you on the data released in the first half of this week and it will include our NFP preview. 

What else could move markets this week 

Elsewhere, the European Union are meeting this weekend to choose their new leaders, which includes a new President for the ECB. If the hawkish Jens Weidmann gets the top job, then expect the euro to rally across the board. Also, the pound could be under pressure after Jeremy Hunt said that he may have to pursue a no-deal Brexit “with a heavy heart” if a new deal cannot be agreed with the EU before the October 31stdeadline. This means that the two candidates who are hoping to be the next UK Prime Minister would be willing to take the UK out of the EU without a deal later this year. Since Brexit and no-deal have been kryptonite for the UK currency, we could see some pound weakness as we start the week. GBP/USD declined on Friday and lost its 1.27 handle, the low from 19thJune at 1.2510 is now a major short-term support level, and if Brexit starts to weigh on GBP this week then the pound could have some way to fall. Interestingly, the technical signs are looking positive for the pound at the start of this week, so any decline could be short-lived.

Why the NFP is crucial for gold 

Our commodity to watch is gold. It had a stunning run last week and finally broke key resistance at $1,400. The fundamental reasons to buy gold include as an inflation hedge now that some major central banks are considering cutting interest rates, and as a hedge against rising global risk (and rising stock markets). We continue to think that the outlook for gold remains strong, however, a strong NFP report on Friday and a reduction in expectations of a Fed rate cut could knock the yellow metal, key support lies at $1,340, a resting point from mid-June.