Talking Points:
- Amazon's Thursday evening morning beat did not translate into clear equity strength, opening clear risk for Apple Tuesday
- Trade war fears have eased since the EU-US agreement Wednesday, but don't expect this theme to simply fade into the background
- For scheduled event risk ahead, we are overloaded with 5 rate decisions, NFPs, trade figures, earnings, GDP readings and more
What do the DailyFX Analysts expect from the Dollar, Euro, Equities, Oil and more through the 3Q 2018? Download forecasts for these assets and more with technical and fundamental insight from the DailyFX Trading Guides page.
Risk Trends and Earnings
Over the past few years, sentiment seems to have drawn its bearings and momentum from unusual fundamental sources. From political promises to trade wars, the dominant drivers behind risk assets were far from the themes that we found in textbooks. That said, it seems somewhat banal that we would return to one of the traditional motivations to usher in a next critical phase for overextended speculative markets. And yet, there has clearly been a stronger reaction these past few weeks to earnings than what we have seen at the broader market level than what we have seen in some years. Whether that is because market conditions are prone to motivation or corporate health is genuinely that systemically important is beside the point. If it start a movement that gains traction, we should monitor it closely. Through the end of this past week, risk trends took a notable tumble through Friday's close. One of the key FAANG members, Amazon seemed to leave us with a positive lean with its figures Thursday evening. And yet, the subsequent session dove through the close following an initial gap higher. Is this a sign that a bias is arising where 'good news' can't lift the markets? Or perhaps it was the cumulative influence of all the components' numbers making a spokesperson out of Facebook's extreme loss of market cap? This sets the scene for Apple - the world's largest company - releasing its figures Tuesday after the bell.
A Competition for Attention Among Major Themes
Earnings will certainly be an important 'theme' to keep track of over the coming week - though it is perhaps beneficial that there is only one truly important update to keep tabs on for systemic influence. Yet, corporate health isn't the only major theme that can strike a risk nerve over the coming week. Trade wars is a driver that will inevitably return to the forefront - though when is unclear. The press conference by US President Trump and EU President Juncker this past week seemed to take some of tension out of the global drive to extract growth at the expense of trade partners. When you look more closely at what was agreed to, there was little of substance that would genuinely benefit their respective economies, but the vow not to introduce new tariffs so long as negotiations were ongoing is significant. Holding back the threat of a 20 percent duty by the US on all European auto imports and the response of a $300 billion tariff by the EU on US imports will prevent certain recognition of an economic disaster. Yet, this was not the only front on trade wars. There has been no easing of pressure between the US and China, and these are still the two largest economies in the world. And another theme to be wary of for sentiment purposes is monetary policy. There are five large central banks due to deliberate on monetary policy next week, but only three are considered major. While each has the capacity to be a significant source of volatility for their respective currencies and capital markets, there is a systemic influence for global policy that has contributed a lot to the climb in capital markets these past 10 years. It can also promote its demise.
Market Potential for the Yen, Dollar and Pound
While the collective view of monetary policy can redirect the bearing on global risk trends - under the right conditions - it can more effectively move the individual currencies that correlate to the relevant central bank. Of the major central banks due to announce their rulings, the most loaded scenario forms around the Bank of England's (BoE) meet. This is the 'Super Thursday' meeting that adds the Quarterly Inflation Report to the standard rate decision for a more in-depth update. Yet, we may not need to resort to the nuance of the report in this meeting as the market's expect a 25 basis point hike at this meeting. According to overnight swaps, the probability of a hike at this gathering is a robust 77 percent. The real question is how influential monetary policy is as a fundamental driver relative to Brexit for a material influence over the Sterling. The Federal Reserve decision on Wednesday in contrast is not expected to deliver any change to the benchmark rate. This is 'off the quarter' which means the FOMC is not due to tighten in its regular course towards 'four hikes in 2018' at this particular meeting. However, we would expect rhetoric to keep September on the books. Otherwise, the markets will readily pick up on the reservations. Finally, the Bank of Japan (BoJ) expectations are the most reserved. That said, adaptation to a virtually unmoved central bank makes the markets particular sensitive to nuanced change. This past week, a report that the BoJ was discussing a change in its QE program led to assumptions of a hawkish shift. We will see if those expectations have any merit.
NFPs, Eurozone GDP, Brexit and More
As is often the case, overbearing fundamental themes will compete with scheduled event risk for sway over key currencies. In fact, the sheer volume of scheduled event risk this coming week will make for difficult trading conditions. Even when there is a clear signal from a data release or update from a key theme early in the week, anticipated event risk later in the week can sideline an otherwise robust move. That is likely to be the case with the US dollar. Wednesday's Fed rate decision carries enough heft to redirect trend and/or charge momentum, but the ultimate run it forges will be tripped up by the expected release of Friday's July NFPs. Employment statistics matter on an economic basis, but their grander influence over monetary policy has largely been tapped in dollar terms. Continuing the run of 2Q GDP figures for the largest economies in the world, the Euro-area will report its aggregate update. The French figures were the first of the 'core' economies updates to cross the wires. The entire region will be gauged for its health to fend off a trade war and future internal pressures from members like Italy. As for the British pound, the Thursday rate decision will draw our attention forward, but how much run will we find whether the central bank hikes or not? The uncertainty surrounding Brexit has effectively cut this currency's ability to turn on trends consistently for months. We discuss all of this and more in this weekend Trading Video.
If you want to download my Manic-Crisis calendar, you can find the updated file here.
