The first day of the new month started positively overnight with Asian and European shares rallying sharply. But shortly after Wall Street opened, things started to turn negative, causing European shares to close off their best levels and US indices were struggling to hold onto the positive territory when this report was being written. A flurry of weaker-than-expected US economic pointers raised concerns over growth, which triggered profit-taking after recent optimism surrounding US-China trade talks had sent stocks higher for two consecutive months. But will the bears be able to hold down the markets for too long given the recent strength of the markets?
Looking ahead, the upcoming week features interest rate decisions from three major central banks (RBA, BOC, and ECB), while data highlights include UK and US services PMIs, Aussie GDP, Chinese trade figures and jobs reports from both North American nations. Below are next week’s highlights (emphasis mine):
- Aussie Building Approvals
- Eurozone Sentix Investor Confidence
- U.K. Construction PMI
- RBA rate decision
- U.K. Services PMI
- Eurozone retail sales and final services PMI
- Flash services PMIs from Spain and Italy
- US ISM non-manufacturing PMI and new home sales
- Speeches from BoE’s Carney and RBA’s Lowe
- Aussie GDP
- US ADP private sector payrolls
- BOC rate decision
- Aussie retail sales and trade figures
- ECB rate decision and press conference
- Chinese trade figures
- German factory orders
- US non-farm payrolls report (NFP)
- Canadian jobs data
With Friday’s soft US macro data triggering a so far short-lived risk-off response on Wall Street, it will be interesting to observe how the markets will react should next week’s data also disappoint expectations. As well as the US jobs data, investors will also pay close attention to China’s trade figures, German factory orders an Aussie GDP. In terms of central bank rate decisions, the three highlighted banks are widely expected to hold their respective policies unchanged:
- The Reserve Bank of Australia’s last policy change was in the summer of 2016, when it cut the benchmark interest rates to the current record low of 1.50%. Last month, the RBA Governor Philip Lowe said that the next rate change could either be a hike or a cut, pouring cold water on rate hike expectations. The Aussie dropped, although the stream of positive news related to the US-China trade talks have helped to keep the downside limited so far. The RBA is likely to re-iterate its slightly dovish message, which could trigger fresh selling.
- The BOC’s hiking cycle appears to have ended for now, although at its last meeting, the central bank noted that the “Governing Council continues to judge that the policy interest rate will need to rise over time into a neutral range to achieve the inflation target. The appropriate pace of rate increases will depend on how the outlook evolves, with a particular focus on developments in oil markets, the Canadian housing market, and global trade policy.” Well, Canadian Housing Starts and Building Permits both rose sharply for two consecutive months, but prices have remained largely unchanged. The US-China trade talks are progressing well, but nothing has been signed. And oil prices have gained ground, but the bullish momentum has faded over the past couple of weeks or so. In other words, not a lot has changed to encourage the BOC to hike at this meeting.
- The European Central Bank isn’t expected to hike at least until Q3, but even that looks increasingly unlikely owing to the recent soft patch in Eurozone data and waning inflationary pressures. The euro has been fairly stable with the main EUR/USD exchange rate holding its own around the long term 1.13 support area for a number of months now. We are doubtful that the ECB would trigger a major move in this pair, so ranges could continue to dominate.
Although the above central banks are unlikely to change their respective polices, but that doesn’t necessarily mean their currencies won’t respond. Subtle changes to the wording of their policy statements could be enough to trigger a 50- or 100-pip move in a very short space of time. Volatility could also come in the form of major surprises in upcoming data releases, or unexpected announcement, for example, regarding Brexit or US-China trade situation. So, next week should be very interesting indeed.