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Week Ahead – Markets Remain Focused on Geopolitical Risks

Iran, Trade Updates, Fed Speak, more rate decisions in focus 

We could see markets return to being fixated on trade updates, some corporate earnings (Nike, Micron, Conagra and Vail Resorts), yield curve inversions and stress on the money markets.  On Saturday, Labour, the main UK opposition party will meet in Brighton for their annual meeting. Sunday, we will see if President Trump and Indian PM Modi can make any progress over mounting trade tensions.

Next week will hear from several central bankers, see a handful of rate decisions and see if PM Boris Johnson alters his Brexit strategy after we hear the UK Supreme Court ruling.  On Tuesday, politics will be plentiful as UN has several speakers (Trump and Macron) address international issues at the General Assembly. Friday, we see the Fed’s preferred inflation gauge and US consumer sentiment readings along with personal income/spending.  With the Fed’s forecast not targeting any major declines in growth, markets will closely react if we see a steady stream of weaker economic data points.

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On Friday, there are ratings reviews on Poland (Fitch), Saudi Arabia (S&P), and Israel (Moody’s).

Central Banks this week (for currencies that we offer):

  • Monday – No meetings
  • Tuesday – Hungary Rate Decision, RBNZ Rate Decision, BOJ July Minutes
  • Wednesday – Thailand Central Bank (BoT) Rate Decision, Czech CNB Rate Decision
  • Thursday – Mexico Central Bank (Banxico) rate decision  
  • Friday – No meetings

Central Bank Speakers (at the time of writing)

  • Monday – BOE’s Tenreyro speaks at ECB conference, ECB’s Draghi testifies at European Parliament, Fed’s Williams speaks at Treasury Market Conference, Fed’s Bullard discusses US economy
  • Tuesday – BOJ Kuroda gives speech in Osaka, ECB’s Villeroy speaks in Paris, Riksbank Ingves and Jansson in Parliament, RBA Gov Lowe gives speech.
  • Wednesday – ECB’s Coeure speaks in Frankfurt, Fed’s Evans talks about economy, Riksbank Floden gives speech, Fed’s George speaks to Senate Banking Panel, Fed’s Kaplan speaks in moderated Q&A
  • Thursday – BOJ Gov Kuroda speaks, ECB publishes economic bulletin, Fed’s Kaplan speaks, ECB’s Draghi speaks in Frankfurt, BOE Gov Carney speaks on Financial Services, Fed’s Bullard speaks, Fed’s Kashkari speaks in Montana, Fed’s Barkin speaks in Richmond.
  • Friday – BOE’s Saunders speaks in Barnsley, ECB Policy Makers Guindos, Knot speak in Frankfurt, Fed’s Harker speaks to Shadow Open Market Committee

Markets

USD

It seems US data does not want to deteriorate and unless we see a massive string weaker than-expected reports, we will likely see expectations remain mixed as to whether the Fed will cut rates again before year end.

The next few weeks will be critical for the trade war and expectations are growing we could see an interim deal.  Both sides will be jockeying to come from a position of strength, but both Trump and the Chinese should be motivated to see a major de-escalation.  Talks could easily collapse if see China try to swap any structural changes for the promise of buying more American goods.

Markets are starting to become more focused with the Fed’s plumbing (money markets) and on the steepness of the yield curve.  Since the Fed’s second consecutive rate cut, the 10s/2s spread is once again nearing inversion territory.

We will likely continue to see Fed deliver liquidity with another operation on Friday given rising submissions.

The funding markets are critical for the US economy and until the Fed delivers a permanent fix, this will be nuisance with overnight rates and dollar funding.

Bitcoin 

Bitcoin volatility has eased up in recent weeks, but that is unlikely to last. With recent ETF proposals getting pulled, it seems the regulatory future remains difficult for digital coins.

We should not be surprised if we see wider trading ranges in the coming weeks.

Oil

Energy markets are primarily focused on an Iranian or Saudi/US next escalation, Saudi output and Texan floods. The repercussions of the drone attacks on Saudi Arabia’s oil facilities will be felt for weeks if not months, but the bigger story will be if we somehow end up seeing Iranian tensions end up into an all-out war. Geopolitical risks should keep energy prices somewhat supported even as Saudi returns production back to normal levels.

Oil is sensitive to various developments be it inventories, global growth, the trade war, Iranian sanctions or OPEC.

Gold

Gold is looking more vulnerable the longer it struggles to return to the top of its recent range. Geopolitical risks and accommodative monetary policies should see the yellow metal supported on a major selloff.

Gold is sensitive to many things including central banks, the trade war and overall risk appetite. The latter two are particularly volatile and so gold could see big swings out of the blue.

Politics

Brexit

There’s been very little progress this week as the Supreme Court hears evidence on the legality of the prorogation of Parliament (ruling due Friday but will likely change nothing). Speculation will undoubtedly continue but details continue to be few and far between.

Reports can break at any time and sterling remains extremely sensitive to Brexit developments.

Italy

Former Prime Minister Matteo Renzi has split from the Democratic Party to form a new group that will continue to support the coalition. There are a number of lawmakers loyal to Renzi that could also break away but exact numbers are hard to find.

Minimal risk. Italian political instability is common and there’s little movement in Italian bonds to suggest this has bothered investors as the government remains stable. EUR unresponsive.

Spain 

Snap elections scheduled for 10 November after the Socialist Party