Stocks in the US ended the week flat, with the S&P 500 off around 1% from the previous week. It was a similar story for the local market with the ASX 200 index down 1.14% for the week, while the Aussie dollar climbed off the mat as the US dollar reversed its highs and US bond rates did the same. The US 10-year Treasury bond closed at 2.39%, down from the week’s high of 2.44%.
Can the US dollar stay firm? Will bond rates sell off further? And what’s going to happen to the stock market rally as traders wonder about just how hawkish the Fed might be in a week’s time?
Before that, it’s another huge week for traders.
Chinese president Xi Jinping said he was already watching US politics “very closely” before the weekend’s phone call between president-elect Trump and the Taiwanese president. So far markets have celebrated the potential reflationary aspects of what we might call Trumponomics. But that celebration included an element of fear, or at least concern, about the impact Trump’s presidency will have on emerging markets. Asian currencies, LatAm forex and the Turkish lira have come under heavy selling pressure.
It seems politics is going to be an important driver of markets in the months and years ahead. So it’s worth noting that Looking at the US, Chinese president Xi told former US secretary of state Henry Kissinger on Friday that “We are now in a key moment. We on the Chinese side are watching the situation very closely”.
So it’s worth noting China has lodged a diplomatic protest following Trump’s call with Taiwan’s president over the weekend.
But Donald trump doesn’t appear fazed.
A big swirling Italian mess. That’s the way John Mauldin, global renowned financial expert and New York Times best-selling author, put it in to kick of his weekly email over the weekend. And he’s right. Because even though most market participants seem to now think even a no vote won’t disrupt global markets Maudlin suggests there is more more to play out for Europe.
Italians are headed to the polls this Sunday (and thus this letter is reaching you a little earlier than usual) – but no one is quite sure what is on the ballot. On the surface, the voters are considering whether to approve constitutional reforms that should make the government operate more effectively (or not, depending on your point of view). But many people think the real question is whether the current government should stay in power and whether Italy should remain yoked to the Eurozone.
Coming up with an answer isn’t necessarily helpful when you can’t even agree on the question. However Italians vote, it may take some time to figure out exactly what the result means to Italy, the Eurozone, the EU, and the global economy. I am fairly confident that the ultimate outcome won’t be good, no matter what they choose. The problems are deeper than simple structural reform can cure.
(courtesy NAB Economics, our emphasis)
There are two key events in Australia this week – Q3 GDP on Wednesday (with important partial data on Monday and Tuesday) and the RBA’s final board meeting of 2016 this Tuesday (with the focus on global and US economic and market developments since the election, there hasn’t been that much of a focus on this meeting).
Australia’s Q3 GDP could show negative growth.
The NAB is expecting a small negative outcome (-0.2% q/q), which is a bit weaker than the market consensus (+0.2% q/q) and a fair bit below the rate implicit in the RBA’s latest forecast. The expenditure side of the accounts appears particularly weak, with quarterly retail sales weak, capital expenditure continuing to be hit by the latter stages of the mining investment downturn and a surprise contraction in residential construction. Net exports are also expected to subtract from growth (-0.3 ppts), while government expenditures are expected to ease back after strength in the previous quarter.
The income and production sides of the accounts are likely to be a better, with stronger company profits (NAB expects +2.5% q/q; mkt +3%) likely given the recent rise in commodity prices and terms of trade (likely to be stronger again in Q4, given even more recent developments).
(also courtesy NAB Market Economics)
Global : The weekend’s Italian and Austrian referendum/presidential election, followed by a host of Fed speeches, the non-manufacturing ISM (Monday), the ECB meeting on Thursday (which will likely provide further ideas about the prospect for both tapering and extending Europe’s QE program).
US: There are lots of Fed speakers scheduled, the non-manufacturing ISM release (Mon), plus supplementary information on the labour market in the form of JOLTS (Wednesday) and the Fed’s LMCI (Monday).
China: It’s a big week of Chinese data with the release of Caixin services PMI Monday, foreign exchange reserves on Tuesday will be extremely important given worries that outflows from China are picking up. Thursday sees the release of trade, and inflation data due Friday.
Japan: BoJ governor Kuroda speaks Monday, before CPI is released. GDP for Q3 is Wednesday, along with trade.
Euro: The ECB meeting on Thursday will be closely watched as the market expects the announcement of both an extension of the QE program, and a reduction (tapering) in its pace.
UK: Sales data on Tuesday and Industrial and Manufacturing data on Wednesday will be watched to see if the current trend of upside surprises in the UK economy continues (reflecting the substantial fall in the GBP ahead of the actual negative effects of Brexit). As we saw during the week, news about the form Brexit may take continues to have a significant impact on UK markets.
Canada: The latest Bank of Canada meeting will be very interesting given the prior meeting saw the bank come close to easing. The Bank’s commentary since that time has seemed a little more relaxed and the decline in the CAD and strengthening in oil prices may see it continue to monitor economic trends.
NZ: Release dates remain under review due to recent earthquakes (Wholesale Trade, Manufacturing Survey and Building Work all delayed until following week). The main events are the Half-Year Economic and Fiscal Update (which might provide info on possible tax cuts), the parliamentary testimony by RBNZ Governor Wheeler and November’s ANZ Commodity Price Index.