Duncan Donald

Mon, Jan 7

Weekly Markets Update - 07/01/2019

It was an explosive start to 2019! Towards the close of the first full trading day on Wednesday 2nd January with low liquidity due to extended holidays in some regions (notably Japan) and as the Sydney market handed over to Asia, news broke that Apple (AAPL) downgraded their annual sales forecasts.  Apple sited poor sales in China, having already seen a marked slowdown and the news acted as the catalyst for a plunge in stock index futures, which in turn brought a huge flight into the safe havens of the Japanese Yen, Swiss Franc and Gold. The Yen led the way, whilst it is believed that algorithmic influence again resulted in a move way beyond the depth of the news which caused it.

Having plunged to just below the 105.00 level in USD/JPY, a level that unquestionably raises concerns for the Bank of Japan, realism set in and the USD/JPY market swiftly corrected much of the initial move. Obviously, the corrective move was not a full reversal as the reality of concerns over global growth remain at the forefront of minds as we head into the new year. Apple’s warning just underlined this fear as in the following days, Apple’s value fell to the $700 billion level after peaking at over one trillion dollars last year.

The extreme volatility continued throughout the end of last week, with stocks being at the forefront of the moves as the currency markets played catch up. It was a generally positive week by the end for the equity indices, with nearly all major averages recovering to finish positive or close to it. The Eurozone indices arguably were the best performers, with the US Markets just clawed back to positivity in the last session.

US employment data brought what should have been welcome news for the US Dollar, despite the slight increase in unemployment from 3.7% to 3.9%, this was far outweighed by headline Non-farm Payroll of new jobs generated hitting 312K, above the forecast of 179K, with Average Earnings in the US increasing to 0.4% from 0.3%.  The immediate price action was subdued, in the knowledge that less than 2 hours later Jerome Powell, the Chairmen of the Federal Reserve was about to get his first chance to speak this year.  The last quarter of 2018 saw the FOMC’s commitment to rate hikes called into question by the US President and then global market participants, with slowing global growth and an ailing stock market sited.  Interest rate markets are now pricing in just one rate hike with the Federal Reserve guiding towards two.

The strength of the employment data and failure for any significant Dollar positivity, backed Powell’s view on rates.  However, the reluctance of USD long positioning underlines the market is not sharing the committee’s views.  On Friday afternoon, Powell’s speech boosted stocks and despite supportive employment data, his tone shifted, opening the door to changing the direction of Federal Reserve policy, being reactive to market conditions. He also chose to speak out against President Trump, reiterating that Monetary Policy should remain non-political and underlining that there had been no communication between himself and the President. But it was his comment that if asked by the President he would not be prepared to tender his resignation, which really underlined the rift between the FOMC Chair and the White House.

On the Brexit front, last week brought no significant traction, as Parliament enjoyed an extended holiday shutdown, which certainly seems unwarranted due to the magnitude of the task facing the UK in its quest to formalise a deal to suit all parties. We can assume Prime Minister Theresa May would have been holding many private meetings with MP’s during the break, as she tries to achieve the required support to get her Brexit deal through the rescheduled vote. As speculation grows, she may need to further delay the vote scheduled for next week as its thought that as many as 70% of Parliament members could vote against the deal. But on the whole, market reactions to Brexit were subdued as both the Pound and the FTSE held up well for the week.


This Week’s Data:

In the UK - In the first full week back, all eyes will naturally fall on the UK’s PM May to start showing some progress on Brexit, so naturally the Pound could be vulnerable to developments and speculation on the Parliamentary vote.  The key UK economic event will be Bank of England Head Mark Carney speaking on Wednesday 9th January.  From a data perspective on Thursday, we get the Bank of England Credit Conditions Report and Friday at 9:30am GMT, we’ll get Industrial and Manufacturing Production, Trade Balance and GDP data.

In the US - Monday brings US Non-Manufacturing PMI.  Wednesday sees the first of the FOMC speakers of the week as we hear from Evans and Rosengren, ahead of the minutes from the December Fed meeting at 7pm GMT that same evening.  Thursday brings further speeches from Bullard, Evans, and Clarida, as well again from Fed Chairman Powell.  On Friday, we see US Consumer Price Index data.

In the Eurozone – We start the week with Retail sales Monday, before the German Industrial Production on Tuesday and Trade Balance on Wednesday. Wednesday also brings the Eurozone Employment rate and Italian Unemployment data.  On Thursday, we get an insight into the thoughts of the ECB with their Monetary Policy meeting account from December.

In Canada - On Tuesday, we get the Trade Balance report but Wednesday will be one of the biggest events of the week as the Bank of Canada announces their interest rate decision where it was widely expected for a hike in the overnight rate by 25 basis points, up to 2.0%.  However with the shift on rates coming from the US, it is unlikely we’ll see any movement at this meeting and therefore, comments from BOC Governor Stephen Poloz afterwards will be crucial.