The week ahead will be one of the most hectic in Q4 for the USD, MSCI Emerging Markets Index, stocks, oil, EUR and GBP.
Stocks & MSCI Emerging Markets Index
Generally, stock markets continue to strengthen, particularly if we speak about developed economies. The MSCI Emerging Markets Index follows an easing curve, going on an eight-month advancing streak that started in September.
European bonds have outperformed their US counterparts as US prices are following an ascending curve and European rates are dropping. The US 10-year yield increased about 2.40%, yet it finished the week a little bit above the threshold.
The USD has been moved by the US bonds since the beginning of September. Analysts argue that the dollar’s reversal from late April through early September is actually a correction of the greenback’s run since mid-2014. This corrective move was bolstered by the relaxation of the political turbulence that troubled Europe after the referendum in the UK and Trump’s winning the elections in the US. Europe was dominated by inflation fears, doubts about the Fed, as well as the need to adjust to the unconventional US administration.
The dollar’s rally, which seems to be a sign of the country’s economic recovery took many short-term investors by surprise. However, experts do not expect that the monetary policy peaks before 2019.
USDEUR trades today around 1.16287.
The FOMC meeting scheduled for Wednesday, 1 November is likely to contribute to certain headline risk in the market. The US President is expected to announce the Board of Governors nominees in the next few days. The market has seen Powell as the most likely to succeed Yellen. However, the scales were tipped in favour of Warsh and lately Quarles, who seems now to diminish the chances of the former, while Taylor is also in the race. Regardless of who takes over the Fed ruling from Janet Yellen, the monetary policy is unlikely to change. Generally, Yellen is perceived more dovish compare to Taylor seen as rather hawkish.
At the end of the week, the House of Ways and Means Committee is expected to release the first detailed tax reform bill. This will again attract some volatility across all markets.
NFP – USD in focus
Moving forward, the US job report reflecting a drop of 33k jobs in September does not reflect the overall economic situation in the country due to the impact of the storms. October’s figure is expected to show signs of sharp recovery. Bloomberg’s survey report shows a 310k increase in non-farm payrolls. Before September, the NFPs showed an average of 171k monthly in 2017. This pace characterises the last three months. Therefore, a print exceeding 350k for October.
In Europe, market participants were confident about a BOE rate cut. Analysts expected that BOE would stay on hold as a sentiment of slowing economic growth in the UK combined with an envisaged peaking CPI prevailed in the market.
The ECB’s delivering a dovish tapering paves the way for a BOE’s dovish rate hike. This means that the GBP could be sold, however, this is dependent on the dollar’s direction. The interest rate market is expected to adjust. The UK 2-year Gilt yielding virtually half as much as the December 2018 short-sterling futures (46 bp vs. 88 bp) seems to be breaking the alignment. The December 2019 short-sterling contract yields 108 bp.
GBPUSD started the week around 1.31592.
Before the weekend, Brent oil traded above $60 per barrel, reaching a level which has not been seen in the last 2 years. US WTI hit an 8-month high approaching $54. Saudi Arabia expressed its interest to extend the production restraint beyond March 2018, while the supply disruption from Iraq-Kurds continues. Global PMI reports also cast a positive light on the oil market’s evolution. While a couple of large companies, including Exxon (NYSE: XOM), Chevron (NYSE: CVX) delivered less than expected, Total (NYSE: TOT) reported its best oil and gas earnings in 2 years.
WTI for December closed the week with 4% gain. This is particularly impressive as the dollar appreciated. This is the third weekly advance and a higher close position for the eighth consecutive week of the past nine. Leaving the technical indicators stretched, this pace is likely to lead to near-term consolidation.