It was a tough week for US equities last week, with the Dow, S&P and Nasdaq each falling over 4% despite some strong data, notably from the timely Institute of Supply Management’s Manufacturing and Services indexes which both beat forecasts. Whilst both the ADP and Non-Farm Payrolls employment numbers fell short of expectations, they were still very positive. Perhaps the greatest irony of the market collapse was that a more dovish Federal Reserve Bank coupled with some relaxation in the ongoing trade tensions between The US and China was meant to bolster markets; it had the opposite effect- longer term bond yields fell, thereby flattening the yield curve to an extent that the recession scaremongers had their way, aided and abetted by the distortionary effect of a market that is 60% dominated by computer algorithms. Also, ironic was the extent to which banking stocks suffered, in an environment where interest rates are rising for the first time in about 10 years.
Other notable takeaways for the week were a poor Australian 3rd quarter GDP print at 2.8% Y/Y which stifled an Australian dollar rally; an excellent Canadian employment report with 94,100 jobs created versus expectations of a mere 15,000, a proposed cut in OPEC oil production which boosted oil prices and a surge in the price of Gold, which broke through resistance at 1240 oz and soared away to close the week at 1254 oz. The British pound remained relatively stable despite the possibility that the increasingly beleaguered British Prime Minister Theresa May faces a likely defeat in next Tuesday’s parliamentary vote on her Brexit agreement with the European Union.
This week promises to be as exciting, with plenty of opportunities to trade, whether it be in equities, currencies or commodities. We have two ultra-important and timely US data releases in Consumer Price Index and Retail Sales, as well as interest rate announcements for Switzerland and the Euro-zone, and of course the UK parliamentary vote on Brexit. On the periphery there are also figures for Canadian Housing Starts, Australian Business Confidence and the Japanese Tankan Manufacturing and Non-Manufacturing Indexes.
Wednesday’s US Consumer Price Index follows on from Tuesday’s US Producer Price Index which is expected at 2.5% Y/Y (Nov). CPI is expected to read 2.2% Y/Y (Nov) slightly higher than last month’s reading and is an important consideration in Fed interest rate policy. US Retail sales on Friday is expected to be quite poor at 0.1% M/M (Nov). So, we may again have some Friday fireworks in US equity markets.
Both the Swiss National Bank and the European Central Bank release interest rates on Thursday and both are expected to leave interest unchanged at -0.75% and 0 % respectively. The ECB is set to announce the end of quantitative easing and thus opens the path for its own interest rate tightening cycle due to commence some time in 2019!
Tuesday is a big day for Theresa May and her Brexit plan which is likely to suffer defeat in the House of Commons. Whether this has been priced into the markets is not entirely clear. Markets will react to the result, any contingencies if the vote fails, and the fate of Prime Minister May. So, expect some volatility for the British pound.
For Canada and Australia, the story seems to have reversed somewhat; until last week’s disappointing GDP number, the Australian dollar had seen a sustained rally which had seen it break through important resistance at 0.7300 only for it to retrace back into its 0.7000-0.7300 range. Conversely, the Canadian dollar which has weakened since the Bank of Canada raised interest rates last month, snapped back after strong Manufacturing PMI and a superb jobs report. It also benefited in tandem with the small oil price recovery. This week we have some smaller economic data releases that may be confirm the relative moves. On Monday we have Canadian Housing Starts expected at 198,000 followed by Australia Business Confidence out late Monday night/ early Tuesday morning. In Japan, Thursday’s Tankan readings for Q4 Large Manufacturing and Non-Manufacturing are likely to be slightly weaker at 17 vs 19 and 21 vs 22 respectively.
I shall be keeping a keen eye out for Gold, Oil, The Canadian dollar and the British Pound this week.
Good luck and good trading. Watch out for me on video on Tuesday and Thursday. Ben Robson