October has traditionally not been a kind month for financial markets, and that trend has continued at least into the first half of this month as evidenced by the recent spate of selling on global bourses. Looking ahead, the Fed remains the focus this week, with global markets still in a heightened state of anxiety over what potentially tighter monetary conditions will entail for both company profits and liquidity conditions in general.
The US Dollar has given up some ground recently, with a pullback in Treasury yields denting appeal for the greenback. Traders will be keenly eyeing a raft of US economic data out this week, with Retail Sales, Industrial Production, FOMC Minutes and the Philly Fed Manufacturing Index all likely to be pivotal in shaping market expectations for future interest rates. So, we can expect some heightened volatility around these important data announcements, particularly if we see any upside surprises to the numbers.
Chinese economic data will also be closely watched this week, particularly in light of the ongoing trade tensions between the world’s two largest economies. The decision by the PBOC to reduce the Reserve Requirement Ratio (RRR) last week created some concern among investors, and as such, the key CPI and PPI releases this week could raise further questions over the ability of the Chinese economy to weather a prolonged trade war should these key data releases hit a soft note.
Traders of the Euro will be listening for any new dialogue between the ECB and the Italian government regarding budget targets for 2019, whilst on the economic data front we have German ZEW Economic Sentiment due on Tuesday, as well as Final CPI figures on Wednesday. Meanwhile, The British Pound will again be impacted by ongoing Brexit talks, with the fact that we are now seeing some target dates for action at least giving the impression that the wheels are in motion. Economic releases of CPI, PPI, the Unemployment Rate and Retail Sales are all due on the UK calendar this week also.
The performance of the Canadian Dollar this week could be subject to swings in the oil price, with both WTI and Brent Crude moving quite sharply of late. Those who are watching the CAD will also be taking note of Manufacturing Sales, CPI and Retail Sales, all of which are due for release in Canada this week.
Elsewhere, the Australian Dollar will take its cues from general risk-sentiment, commodity prices and Chinese data as part of the currency’s attempt to remain north of the psychologically important $0.70 level. The release of the RBA minutes as well as key employment data this week will guide intraday trading, but offshore developments look set to be the most influential factor on the Aussie Dollar this week.
Overall, sentiment will again be the primary driver of risk-assets. With the all- important US earnings season getting underway, company profits will be under increased scrutiny in light of heightened concerns of tighter Monetary conditions going forward. If companies in general (and the main players in particular) undershoot on earnings, this will only further dent confidence in the US economy’s ability to withstand a higher interest rate environment.
Soaring US yields trigger the wrecking ball effect as yields become a source of volatility for risk, rather than a source of support