Trade Wars, Politics and Other Key Themes to Watch Next Week
- Trade wars have clearly garnered the speculative ranks' attention - whether the updates are verifiable or not
- Politics are dominating more of the headlines and thereby more of traders' attention with distinct segue into economics
- Monetary policy and simple economic growth have calendar-based cues ahead, but remember their overarching influence
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The Market-Moving Potential of Event Risk Versus Themes
There is considerable interest in trading high-profile fundamental events and data. Not only can it carry the potential to trigger significant volatility, but it does so with the convince of clear timing. And, we have plenty of noteworthy event risk scheduled for the week ahead - from Chinese GDP to ECB rate decision. Yet, in most cases recently, scheduled event risk is not generating the expected response from the market. Take for example the US consumer sentiment update for January released by the University of Michigan Friday. The indicator was decidedly poor with the biggest miss against expectations in nearly two decades and the lowest overall reading since the President election. That is a considerable reversal on one of the key drivers of economic growth and investor appetite - confidence developing into forward growth. Nevertheless, both the S&P 500 and Dollar rose through the session. This is in part the underlying bias that can filter what market participants respond to, but it is also a statement on the market's preference for more systemic themes. After an October to December slump in the financial system, seeming breakthroughs on issues like the trade wars can kindle a speculative enthusiasm. Don't expect this focus on high-minded issues to dissipate anytime soon.
Market and Economic Calendar
Trade Wars Have the Scope and Presence to Redirect Our Markets
In the range of headline-dominating fundamental themes prompting volatility and trend from our markets, the most consistent is hands-down the progression of the trade war. This past week, we saw just how influential the issue was by prompting market response from mere rumors. On Thursday, it was reported by WSJ and Dow Jones that President Trump was considering lifting tariffs on China to help promote a recovery from the markets. That wouldn't register as far-fetched at all. We have heard similar suggestions from similarly unnamed sources in previous weeks. We have known the President to be pragmatic with policy changes that earn material, short-term reactions for target benefit. Naturally, the market rallied and pushed the S&P 500 beyond short-term resistance. Yet, this rumor was undermined not long after its initial report when a US Treasury spokesperson stated that neither Secretary Mnuchin nor US Trade Representative Lighthizer had given that advisement. The market cooled but didn't seem to be put off. On Friday, another insinuated booster was offered when it was reported (via sources) that China was offering up a proposal to work off the United States deficit with China over a span of six years. The market liked this as well even though US officials were supposedly dubious. Expect this pressure to continue in the week ahead either as a spark to dash emergent hopes or to offer sudden relief with an official breakthrough. And remember, this is not limited to the United States and China. An autos tariff threat has been repeatedly floated by US officials.
Chart of USDCNH Overlaid with S&P 500 in Red (Daily)
Politics, Monetary Policy and Basic Growth Are Spooling Up
Outside of trade wars, there are other nebulous issues for which complexity can curb activity or suddenly take over. Politics is one such trouble. One of the most prominent sources of this pressure is the ongoing, partial US government shutdown. Reportedly shaving off more than 0.5 percentage points of GDP, this has a very tangible economic impact; but it also raises more systemic issues like investors' confidence in investing in the country with such uncertainty over previously promising points like infrastructure investment and sovereign credit quality which could trigger a financial crisis if properly triggered. The more dramatic political headlines should also be closely observed as they can lead to very volatile situations. Of course, it is important to keep the tribal and emotional elements neutralized. Politics aren't uniquely a US issue either. The ongoing Brexit uncertain, stability of the Italian government as growth looks troubled and pressure from the Yellow Vests movement in France are just a few of the international issues to keep a loose tab on. With certain data implications - but where we should remember the systemic considerations - we also have monetary policy and growth to consider. The ECB and BOJ rate decisions are not particularly staged for their own market movement, but they will define how realistic a shift for the world away from extremely easy policy can be with global growth slowing. As for growth, China's 4Q GDP release is a focal point; but there have been numerous warnings about the world's largest economies which speaks to a more global contagion. We focus on top themes you should monitor while trading in the week ahead in this weekend Quick Take Video.
If you want to download my Manic-Crisis calendar, you can find the updated file here.