By Deepta Bolaky
The US mid-term election delivered the expected outcome, and the Fed was also seen as sticking to the Game Plan last week. Market participants cheered the Democratic win, but the relief rally in the wake of the election was short-lived given that investors brought up the question “What will Trump do next?” or should we say “What can Trump do next?” trapped in a divided Congress. The bets are more tilted towards the President ramping up his attacks and exerting more pressure on the Fed given that his policies might be tied up in legislative gridlock.
The election brought a spark of relief after the massive sell-off in October. However, peaked earnings remain a significant concern now that the US election has passed and investors appear to be indecisive in taking risks. After last week speech, we note that the Fed has no intention of changing its plans and is still voicing gradual interest rate increases. Trade tensions and rising borrowing costs are overshadowing the outlook for earnings growth, and the equity markets will probably remain volatile during the remainder of the earnings season.
In the European markets, the budget battle between Italy and Brussels simmers as the deadline to submit a new draft is looming. The sentiment is already soured with the rout in the oil markets and the weak earnings. Asian stocks are also poised to declines on Monday following the struggles on Wall Street on Friday.
Fears have abated compared to last month, but the clouds of all the headwinds on the horizon will make it difficult to bet on the outperformance of riskier assets.
The week will kick-off with a low-key economic calendar on Monday. The US inflation will stand out this week among a few other critical economic releases. Geopolitics will also take centre stage as traders await more headlines on Italy and Brexit.
United States- Consumer Price Index (CPI) and Retail Sales
The CPI, Retail Sales and Industrial Production will be the most significant economic releases for the US. Inflation slowed in September but is expected to have picked up in October. Similarly, the recent Retail Sales figures came below expectations, and the markets are expecting an uptick. The week will end with the release of the Industrial Production data.
Europe and the UK- Italy’s Budget and Brexit
The row between Italy and the EU will be at the forefront this week as Italy have until Tuesday to submit a new draft to Brussels. The expectations from the Grand Coalition in Italy is putting pressure on the parties to build a budget that will satisfy both parties which are consequently affecting both the bond and stock markets in Europe. The budget headlines will primarily drive the shared currency. On the data front, inflation, ZEW and preliminary GDP figures will be the focus in the Eurozone which can provide some support to the EUR pairs if the data are upbeat or meet expectations. Otherwise, the common currency might slide further to the downside.
In the UK, there has been much optimism around Brexit recently and there are renewed expectations that the end of November will reach a divorce deal. Brexit headlines continue to remain the primary driver for the Sterling pairs. At the moment, the Irish border poses a significant obstacle to the negotiations and the currency will likely move to the upside with positive signs or headlines of a breakthrough on the Irish border. Johnson’s resignation and hints that more ministers could be ready to resign are another hurdles that Theresa May will have to face. If more resignations unfold because the proposed arrangements could be “substantially worse than staying in the EU as stated by Johnson”, the local currency could pare all of the recent gains.
Asia & Australia – Australian Jobs Report
The economic calendar will be light at the start of the week. On Wednesday, the Westpac Consumer Confidence and Wage Price Index will be released. The challenges for the Aussie Dollar will be the release of the Retail Sales and Industrial Production in China. Probably, the most important events will be the Japanese GDP figures and the Australian Jobs report. The subdued jobs report in September weighed on its currency as even though the unemployment rate dropped to 5%, the small gain in jobs did not bode well for the economy. The markets are expecting a substantial increase of 20k for the month of October.
Sentiment for the commodities markets are wobbly and underpinned by the rout in the oil markets. Deteriorating demand and rising global output at the main factors that have sent the WTI into the bear market territory. The US decision to offer waivers have accelerated the slide in oil prices. We have seen that oil prices are making a recovery to the upside as of writing.
Base metals are also on the defensive mood due to a stronger US dollar. The reaffirmation of the Fed’s monetary tightening stance to increase interest rates gradually dampened the demand for base metals. Gold has revisited previous resistance levels and broke below $1,210 mark on Friday and will likely remain under pressure as long as the greenback continues to climb higher.
|Tuesday, 13 Nov 2018
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