To say that financial markets have been enduring a tough time of late would be an understatement. Historically, the month of December has generally been a good month for equities and risk-sentiment, but so far this month its been mostly a wild ride south for markets.
The underlying reasons for this have not changed since mid-October when the first signs of discontent started to rear up, with China-US trade tensions, Fed interest rate fears and global growth concerns continuing to plague the market in the final run towards year-end. Just how these three main issues develop over the coming days and weeks will have a large bearing on whether there will be a “Santa Claus Rally” in 2018 or not.
The US Dollar was softer to end last week after the Non-Farm Payrolls number of 155k came up short of the 198k expected. While this was by no means a terrible number, it may give the Federal Reserve some room to err on the dovish side when it meets later this month. In the US this week, the headline events on the calendar will be PPI (on Tuesday US time), CPI (Wednesday) and Retail Sales (Friday). If the data underwhelms in the same manner as the employment report from last Friday, interest rate expectations for 2019 could be scaled back, to the detriment of the US Dollar.
The British Pound spent much of last week chopping around the 1.27-1.28 range after briefly setting a new low for the year just below 1.2660. But we could see a more decisive move this week for the GBPUSD rate, with the key UK Parliament vote on the draft Brexit deal due to take place on Tuesday, December 11th. At this stage, the numbers suggest that the deal faces a mighty struggle to get passed by Parliament, which would then raise the question of what happens next? A new draft deal? A new referendum? A no-deal exit from the EU? Time will tell, but whatever happens is going to likely create some sharp moves for Sterling and its cross-rates this week.
Last week, things went from bad to worse for the Aussie Dollar with the currency sold-off after a soft GDP print, and then going lower still as global risk-sentiment nosedived. In fact, in the space of a few days, the AUDUSD went from knocking on the door of the 0.74 handle to now struggling at the 0.72 level. The Australian economic calendar is light this week, with the AUD to take its cues from broader moves in risk appetite. But any further massive falls on US equities like we saw last week are unlikely to do the risk-sensitive Aussie Dollar any favours.
The oil price got some respite and rallied 2.2% on Friday, after OPEC and Russia agreed to cut production by a combined 1.2 million barrels per day (starting in January 2019, for a period of 6 months). But it’s unclear if this announcement will be enough to reverse the downward trend in oil, and not just because the production cuts came in at the lower end of estimates. With global growth worries at the forefront right now, this could still hamper oil’s recovery efforts in the short term and inhibit the ability of the WTI price to build a buffer above the US$50 per barrel level.
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With the Fed content to frame rising US treasury yields as an echo of economic optimism, bond markets take a breather while oil prices have blown off course