26 November to 2 December: Truce between Trump and Xi: ‘We happy, Vincent?’

Although the year-end is quickly approaching, politics and policymakers are keeping financial markets and investors on their toes. US President Trump and Chinese President Xi met in Argentina. Depending on which media outlet you may read, the takeaway from the G20 meeting may differ significantly. Here is our take. The facts are the following:

• the US and China have finally agreed to engage to reform the World Trade Organization (WTO),
• the countries will initiate negotiations on intellectual property and cyber security,
• the US may refrain from further imposition of tariffs (at least temporarily),
• China agreed to buy more products from the US.

Is this progress meaningful? Not too meaningful from a macroeconomic point of view, but from the aspect of international politics and global market sentiment, such progress is meaningful enough. Our takeaway is that this outcome will not smooth out volatility in markets, but should be just enough to floor further downside risks to asset prices, especially within the emerging universe. To summarise, we quote Pulp Fiction: ‘We happy, Vincent? Yeah, we happy!’

This is the last week this year when the US presents its monthly jobs report. Markets will focus on nominal wage growth, as it is broadly acknowledged by investors by now that labour market tightness has already reached its cyclical peak in terms of the level of employment and rate of unemployment. In addition, various voting and non-voting Fed members will deliver speeches, highlighting their monetary policy outlook. Compared to the US, Europe and Japan will not provide too much excitement in terms of data releases.

Within the emerging universe, Asian economies will start the week by publishing PMI figures from November, including the Caixin manufacturing PMI from China. Furthermore, the central bank of India will have its last monetary policy decision in 2018, and later, China publishes a barrage of economic indicators. In Latin America, the Chilean central bank may keep the policy rate stable at 2.75% and provide guidance on the trajectory of interest rates going forward. In addition, a wide variety of tier-one monthly economic indicators will be published by Mexico, Colombia and Brazil. In Africa, Q3 GDP data are published by South Africa, Kenya and Morocco.

19 to 25 November: No relief for crude oil prices before OPEC meeting

As we noted in our Global Market Update issue last week, oil prices came under pressure due to various factors, one of them being the POTUS’ wish for lower oil prices. Crude oil prices continued to tumble during the week, and as a result, the per barrel price of both Brent and WTI for January delivery dropped 10-11%, hitting USD 50.4 and USD 58.8, respectively. President Trump has already celebrated lower prices by tweeting ‘Oil prices getting lower. Great! […] Thank you to Saudi Arabia, but let’s go lower!’ OPEC will be meeting to discuss and coordinate the strategy of the cartel on 6^th December. Until then uncertainty is unlikely to fade in the oil market, which implies that volatility is likely to remain elevated.

The economic diary contains plenty of relevant and potentially market-moving releases within the developed space for the week. The US is going to reveal the second read of the Q3 GDP figure, PCE inflation measures for October (the Fed’s preferred gauge for inflation) and the minutes from the FOMC’s last monetary policy meeting. Meanwhile, ECB policymakers – including President Draghi – will give speeches. Furthermore, November inflation statistics will be published for the Euro Area.

Several important macroeconomic indicators are scheduled for this week. In Asia, Vietnam releases the monthly macroeconomic indicators for November, China reveals the November manufacturing PMI, while India published Q3 GDP statistics. Latin American markets will mainly focus on Mexican retail sales growth in September, the Brazilian current account and Q3 GDP, and on the monetary policy meeting of the Colombian central bank. Within the African space, Kenya will be the most active in terms of relevant data releases, as the country is scheduled to publish CPI inflation for November, while its central bank may decide on the policy rate.

12 to 18 November: Oil’s rollercoaster ride may not be over just yet

 Crude oil prices have come under pressure in recent weeks. Since the beginning of 2016, oil prices have been rising driven by economic growth as well as support from OPEC policy. Not so long ago, the POTUS claimed that OPEC was keeping oil prices artificially high by not producing enough oil. To abide President Trump’s wish for lower oil prices, OPEC and some non-OPEC oil producing countries increased oil production, which in turn depressed the price of crude. Furthermore, a rise in US inventories weighed on investor sentiment suggesting that a period of oversupply might prevail. To top it off, the US softened the impact of the sanction imposed on Iran by granting eight countries waivers to purchase Iranian oil. Consequently, last week the price of Brent crude oil for December delivery bottomed out at USD 55/bbl, while the WTI crude oil price for January delivery decreased to USD 65/bbl. If global demand for oil is in fact as strong as the International Energy Agency says, oil prices are prone to recover once the POTUS’ grip eases on OPEC. As long as lower prices for oil persist, net oil importer countries, such as India, should benefit from them.

Developed markets have a light diary for economic data for the week ahead, as no major macroeconomic data releases or policy events are scheduled in the US or in the UK. Japan will publish the October inflation figures, while the Euro Area releases the November PMI indices. We believe it is very unlikely that any of the two would impact financial markets in a meaningful manner. Due to the emptiness of the economic diary, financial markets will closely follow the developments with regards to Brexit and the Italian budget. As usual, President Trump could be the wild card for the week, as his unpredictable tweets and measures can easily upset markets.

Similarly to developed markets, emerging markets face a rather light week in terms of data releases. In Asia, Thai Q3 GDP and Malaysian CPI inflation from October are scheduled to be released. In Latin America, Chile, Peru and Mexico release Q3 GDP statistics. Meanwhile in Africa, South Africa, Morocco and Nigeria publish October CPI inflation. In addition, Nigeria also reveals Q3 GDP and current account figures.

5 to 11 November: International trade disputes may not disappear

Positive risk sentiment returned to financial markets after President Trump and the Republican Party lost control of the House of Representatives to the Democratic Party. The risk-on mood fed through into emerging markets. As pressure eased on strained assets, many bounced after a long period of struggle. This begs the question, to what extent is such optimism justified? Although the outcome of the midterm elections may restore legislative checks and balances in the US, it does not automatically imply that President Trump will stop imposing tariffs. Therefore, in our opinion, noise surrounding international trade will not fade, as Democrats have not previously opposed President Trump’s approach to foreign trade. We remain of the view that trade tensions induce additional volatility, but are just noise. These tensions are deterring investors’ attention from the structural shifts that are brought about by the Fed’s gradual balance sheet reduction.

This week is going to be relatively quiet in terms of economic data releases in developed markets. The October CPI inflation data will be released in the US and is unlikely to upset financial markets. The Eurozone will reveal the aggregate Q3 GDP statistics for the whole bloc and then publish the final read of inflation data for October. Additionally, both Japanese GDP data from Q3 and October’s trade statistics are scheduled for this week, the latter of which should shed some light on the impact of trade tensions.

Market players are set to focus on emerging markets, principally China. At the beginning of the week, China publishes some of the most relevant high-frequency indicators, such as retail sales, industrial production and fixed asset investments. Global market sentiment could improve if the Chinese data confirms that stimulus measures by the authorities have started to finally feed through into the domestic economy. Furthermore, India’s CPI inflation will be published, whilst the Philippine central bank decides on the policy rate. In Latin America, the Mexican central bank might lift the policy rate by 25bp to 8% and Colombia will release Q3 GDP growth. African markets are set to have a relatively calm week, apart from the Egyptian central bank’s monetary policy decision, the economic diary is rather empty.

29 October to 4 November: President Trump’s tweet improved global market sentiment

Politics has trumped economics, again. However, rather than bullying investors into retreating from risk assets, as is normally the case, political noise has lifted the mood of market players. An upbeat tweet by President Trump claiming that trade discussions between the US and China have been progressing ‘nicely’ was just enough to turn markets around. In reaction to the tweet, the EM universe breathed a sigh of relief and embarked on a remarkable rally, best exemplified by the appreciation of the Chinese renminbi against the USD, which pulled away from the feared threshold of 7 and gained almost 1.6%, finishing the week below the 6.90-level. In a separate event, the US softened its stance on India and South Korea purchasing Iranian oil, which also contributed to an improvement of global market sentiment. If we can believe President Trump’s claim that negotiations with China are indeed going ‘nicely,’ then the EM universe might just face a less challenging November and December and finish this year on a more positive note.

No week has gone by this year without politics influencing global risk appetite. This week will be no exception, as mid-term elections in the US will definitely influence global market sentiment. On Thursday, the FOMC holds its penultimate monetary policy meeting this year. The Committee is not expected to hike the policy rate, but it is highly likely to strengthen guidance that a 25bp hike in December is required. Turning to the other side of the Atlantic, no major data releases are scheduled in the Euro Area, while the UK will release Q3 GDP.

Within the EM universe, Asian markets will be driven be a wide variety of macroeconomic data, such as Q3 GDP in Indonesia and the Philippines, a monetary policy meeting in Malaysia and foreign trade data from a wide range of Asian countries (including China). Latin American markets are going to focus on the unveiling of President-elect Bolsonaro’s Cabinet, as well as on the minutes of the Brazilian central bank’s last rate setting meeting. Additionally, Mexico will release a wide range of high-frequency data on economic activity, while the Peruvian central bank might just keep the policy rate unchanged. In Africa, Kenyan, Nigerian and Egyptian manufacturing PMI data will be announced.  

22 to 28 October: Will equity markets scare the Fed away from tightening?

Well, of course, ‘it depends.’ The reaction function of the Fed’s monetary policy depends primarily on two factors: the state of the labour market and the intensity of domestic price pressures. Neither have been impacted, nor have the US’ financial vulnerabilities been exacerbated by the turmoil in financial markets. We may receive further evidence this week that inflation is on track to meet the Fed’s 2% target, while the labour market continues to be at the state of full employment. Both are arguments in favour of tighter monetary conditions going forward. Therefore, although recent stock market instability drove the S&P 500 into negative territory year-to-date, the decline of the index might just fall short of the extent that could force the Federal Reserve to rethink its tightening policy.

Markets will have no time to take a deep breath this week, as the economic diary is fully packed with key macroeconomic data that has the potential to influence asset prices. Most importantly, PCE inflation, manufacturing confidence indicators and labour market figures will be published in the US, including the very closely scrutinised wage growth number. In the Eurozone, Q3 GDP will be published which may challenge the ECB’s view that growth in the Euro Area remains solid and broad-based. Meanwhile, the Bank of England decides on the policy rate this week, when Governor Carney might provide further guidance on the timing of the next hike.

In emerging Asia, all eyes will be on Chinese PMI data from October. Should the indicator show stability, markets will find comfort in the idea that trade tensions have had no significant impact on the underlying strength of Chinese economic activity. In Latin America, Mr. Bolsonaro’s efforts to form a government will be watched closely, while the Argentine’ crisis management may support markets. Macro data should gain greater importance as the election in Brazil is behind us. As a result, Mexican GDP data from Q3 will be particularly important this week. Meanwhile in Africa, speculation about South Africa’s credit rating will probably continue.

15 to 21 October: Politics may continue to trump economics this week

Due to the light economic diary in the US and the lack of protectionist rhetoric by the President of the United States, risk assets attempted to recover at the beginning of the week. Indeed, idiosyncratic issues within the EM universe have finally started to fade; crisis management in Argentina continuing, the Turkish central bank maintaining higher interest rates, political risks h gradually dissipating in Brazil, and South Africa expressing its commitment to stabilising the country’s public finances.

Even though China was not labelled as ‘currency manipulator’ by the US Treasury, sentiment in Asian markets remained gloomy, as the never-ending themes of tightening USD liquidity and trade wars hindered the recuperation of risk assets. Continued risk-aversion on the global scene impacted some of the Latin American and African markets as well. Unless international political tensions fade, global market sentiment is unlikely to significantly improve, which could keep financial markets choppy, in our view.

Developed markets will focus on Eurozone PMI indicators at the beginning of this week and will shift their attention to the European Central Bank’s press conference on Thursday during which the monetary authority will almost surely announce that policy rates remain unchanged. Finally, the flash estimate of Q3 GDP growth in the US bears the potential to spur markets to reprice risk assets, again.

In Asia, the Indonesian central bank will hold a monetary policy meeting. Lately, the MPC has sent signals that they might put the tightening cycle on hold. At the end of the week, China releases industrial profits that might shed further light on how companies fare in the world of trade wars. Latin America will continue to focus on Brazilian elections (28^th October) and crisis management in Argentina. Everything else, including the monetary policy meeting of the Colombian central bank will be of secondary importance. African markets eagerly await the release of the budget proposal by the South African government (24^th October), which should be solid enough to convince Moody’s not to worsen the country’s credit rating or its outlook.

8 to 14 October: Chinese GDP data may keep markets on their toes this week

Eurozone member states, Japan and the UK publish inflation statistics this week. The broad spectrum of inflation data will help financial market players assess to what extent higher oil prices translated into domestic price increases. Should there be obvious signs of second-round effects, fixed income assets might reprice – especially on the longer-end of the curve. In addition to inflation figures, the minutes of the September FOMC meeting will be released, which should provide guidance not only on the number of planned rate hikes in 2019 by the FOMC but also members’ sensitivity to macroeconomic data volatility, i.e. how easily rate-setter might change their mind, should actual data deter from their current projections. On the political front, markets will most certainly keep a close eye on the strains between Italy and the EU, as the Italian government is unlikely to back down from the idea of a large(r) fiscal deficit in 2019. Furthermore, financial markets can easily be disrupted by President Trump’s comments, should he keep expressing his discontent with the way Chair Powell conducts monetary policy.

Chinese macroeconomic data return to the limelight this week, as both consumer and producer price inflation figures from September are scheduled to be released. Later, Q3 GDP will be subject to scrutiny demonstrating to what extent trade tensions and adverse financial market sentiment weighed on China’s economic growth. Both metrics are likely to give impetus to financial markets to reprice risk. In Latin America, market players will evaluate Brazilian political polls and put the Argentine central bank’s credibility under scrutiny by assessing LELIQ auctions that will help to evaluate whether the central bank is sticking to its promise of keeping the nominal money supply stable. The release of the Mexican central bank’s minutes from its last monetary policy meeting or the policy rate announcement by the Chilean central bank will be of secondary nature. The African economic diary is very light this week. Consequently, financial markets will focus mostly on the news flow related to South Africa’s fiscal plans.

1 to 7 October: Political tensions and debates remain the driver of markets

As there are no major policy events scheduled for the coming week in developed economies, financial markets are going to mainly focus on inflation releases in the US and in various Euro Area member states. In addition, ongoing political noise risks volatility in asset prices, such as news related to Brexit talks, trade discussions and political tensions within the European Union about the Italian government’s lax approach to fiscal policy.

In emerging Asia, the economic diary is also very light. The data with the greatest potential to move markets will come from China, when the country releases its money supply and foreign trade statistics. The former will be a good indication of whether recent policy measures have started to impact the economy, while the latter will shed some light on the effects of trade tariffs. Latin American markets might gradually shift their focus away from Argentine crisis management and Brazilian elections, as Mr. Bolsonaro gained the largest number of votes in the first round of presidential elections. This week, inflation data are released by Brazil, Chile, Mexico. Furthermore, the Peruvian central bank holds its monetary policy meeting. In Africa, high-frequency indicators will be released, such as inflation in Tunisia and Egypt, and manufacturing performance in South Africa.

24 to 30 September: The Federal Reserve remains cautious, as external risks mount

The FOMC delivered a 25bp hike lifting the range of the Fed funds rate to 2.00-2.25%. The decision itself was broadly expected and caused no surprise. Indeed, markets were unfazed by the updated macroeconomic projection, ‘dot plot’ and press conference. Tweaks in the Fed’s communication and changes in macroeconomic projections were not meaningful, in our opinion; members still see robust growth in 2018 and some deceleration in 2019. According to the updated ‘dot plot,’ the median expectation of FOMC members implies one additional 25bp rate hike in 2018 Q4 and three further 25bp hikes throughout 2019. As a result, the range of the Fed funds rate might rise to 3.00-3.25% by the end of next year, if everything goes according to the FOMC’s view. Markets, however, see the Fed funds rate below 3% at the end of 2019.

In our view, the FOMC’s approach to the conduct of monetary policy and the tone of the post-decision statement were rather cautious. The Fed’s prudence and vigilance are understandable in the context of mounting external risks – such as ongoing trade tensions, a potentially disorderly Brexit, a fiscally irresponsible Italian government, elevated oil prices, etc. – since the Fed does not want to reinforce risk-averse global market sentiment. We remain of the view that the terminal Fed funds rate at the end of the tightening cycle is not the most relevant factor in determining the future direction of markets, but the speed of balance sheet reduction. For the time being, quantitative tightening is progressing gradually and according to schedule.

Looking ahead

Although neither the Federal Reserve nor other major central banks are scheduled to have a monetary policy meeting in the next couple of weeks, financial markets will not be left with nothing to ponder, as tier-one data releases from the US are scheduled this week. Most importantly, the US releases labour market statistics for August, i.e. ADP figures on Wednesday and the usual jobs report on Friday – including the NFP, unemployment rate, nominal wage growth, etc. Meanwhile, on the other side of the Atlantic, Brexit negotiations and Italian news flow are will be in the limelight, as fiscal plans proposed by the Italy’s populist government could further upset financial markets.

In Asia, the week kicks off with the release of PMI figures that will clarify whether business and manufacturing sentiment has been affected by the on-going trade war. On Friday, the monetary policy meeting of India’s central bank (RBI) bears the potential to improve market sentiment, as the RBI is expected to hike the policy rate in response to the recent rupee weakness.

Market sentiment in Latin America will be primarily driven by Brazilian election polls (first round of elections is held on 7^th October 2018) and the negotiations between the IMF and Argentina for the extraordinarily large bailout package. During the week, due to noise coming from Brazil and Argentina, monthly macroeconomic data releases might not have too much of an impact on markets – including the monetary policy meeting of the Mexican central bank.

The economic diary in Africa does not contain any data release that bear the potential to drive local markets. Consequently, global sentiment and idiosyncratic political issues will set the tone in Africa.