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Politics and the Federal Reserve to drive market moves


KEY THEMES

  • Politics and central banks continue to drive market moves for traders. Factors such as Brexit, European elections, the timing of the next Federal Reserve rate hike and now the prospect of another Scottish Referendum vote is all coming together in the melting pot of uncertainty for market outlook. An aggregate trend of dollar strength and positive equity markets remains prominent, but there is also a feeling that markets could be about to turn.

Yellen

  • Central Banks come sharply into focus in the coming days as the Federal Reserve begins its two day meeting which is set to culminate in another 25 basis point rate increase. Interest rate futures according to CME Group FedWatch are pricing an almost guaranteed hike (the probability for March is currently 93%) whilst also pricing for further hikes in June and December this year. That is in line with current Fed dot plots, so the real market move will come in changes to Fed projections and dot plots at tomorrow’s meeting. With the question marks surrounding a lack of real traction in the wage growth, the historically cautious balance of the FOMC may be loath to go even tighter by expanding the dot plots to four in 2017. Whilst labor market slack may be tightening, inflation data is also not moving sharply higher yet (core PCE remains around 1.7%) and this will mean the Fed has the excuse to hold off from sounding too hawkish. I see it as neither a “dovish hike” nor a “hawkish hike”, simply just a hike. This should mean that the dollar will struggle to break sharply higher, whilst equities may also find this to be supportive (especially if the 10 year yield remains below the 2.64% breakout.

  • However the Fed is not the only central bank to look out for as the Bank of Japan, the Swiss National Bank and the Bank of England all announce monetary policy within 24 hours of the Fed. Although inflation has picked up, the BoJ is likely to retain its dovish stance but could begin to communicate in a clearer fashion over its policy of yield curve targeting. In announcing that the BoJ will not increase its yield targets in the near future, this would prevent uncertainty driving yields sharply higher and help to prevent the yen from strengthening too much. The SNB is also concerned over the strength of the Swissy. The Bank of England is entering a potentially even more turbulent phase with the signing of Article 50 and the Bank of England will not want to rock the boat. This meeting is not a “Super Thursday” so it is likely to be a relatively subdued reaction.
  • The Brexit process is set to move into the next stage with the UK government now able to formally trigger Article 50 following Parliamentary approval of the Brexit Bill. However the timing of the move from Scottish First Minister Nicola Sturgeon to push for a second independence referendum means that political uncertainty has been ratcheted up again and this is a risk for sterling, whilst Gilt yields are pushing higher. Interestingly, the negative correlation between sterling and the FTSE 100 remains a key trade in play.
  • Politics is also a key issue with Wednesday’s general election in the Netherlands. Although a lot of headlines have been written about Geert Wilders and his Freedom Party potentially winning, the fractured nature of Dutch politics means that a coalition would be needed for power, and no other party would be interested in working with him. The concern is that a strong showing from Wilders would reflect the burgeoning trend in Europe for populism which could still impact on other elections in 2017, namely France and potentially Italy.
  • The forex markets are still reflecting a stronger dollar, with the dollar strength pulling a test of key levels for the medium term ranges on Dollar/Yen, Cable and NZD/USD. The euro is a curious case which appears to still be holding its own. The French election seems to be giving traders little cause for concern for now as the expectation is still that Macron is likely to be victorious.
  • Equity markets have formed a consolidation in the past week. Although the bull trends remain intact for the S&P 500 and the DAX, the consolidation needs to resolve soon to help drive a breakout. If bond yields continue to break higher, the temptation could set in for profits to be taken in equity markets. A breakout above 2.64% on the 10 year Treasury yield puts the market back on the path towards 3.00%, and levels that equity traders may begin to feel as steep for valuation justification.
  • Watch for: FOMC, BoJ, SNB and BoE

markets

MARKETS

EUR/USD – Ranging near to medium term $1.0500/$1.0700

  • The market is essentially consolidating now between $1.0500/$1.0700. Despite a series of rate hikes from the Fed, the market is turning more positive on the outlook for the Eurozone and this is helping to support the euro. The Dutch election is in focus but should pass without real hitch for the markets.
  • Momentum is neutral on a medium term basis and the support is building now above $1.0500 in the wake of the ECB. Resistance around $1.0700 is now preventing a rally back to $1.0850.
  • Watch for: Dutch Election, FOMC

GBP/USD – Outlook is deteriorating again for a potential move towards $1.2000

  • The prospect of the UK Government formally triggering Article 50 along with the very real threat of another Scottish Independence referendum is heaping downside pressure on sterling just at a time when the Fed is set to hike. The Bank of England is also likely to be cautious/dovish again. Unless the FOMC goes for a “dovish hike” then Cable could be testing the medium term range lows.
  • Lower highs and lower lows, rallies being seen as a chance to sell, whilst momentum indicators are negatively configured with downside potential. This all adds up to a move back to test the 5 month range lows around $1.2000. The key support is $1.1980.
  • Watch for: FOMC, BoE, Article 50/Scottish Referendum updates.

USD/JPY – The range resistance at 115.60 is key

  • With both central banks announcing within 12 hours of each other the volatility could be significant at the back end of the week. The FOMC may not be the driver of an upside breakout, with so much of this rate hike priced in, however, if the BoJ can communicate a dovish continuation then this could weaken the yen and drive a breakout.
  • The market continues to trade in a range 111.60/115.60. Support is forming 114.00/14.50 but the recent two week trend higher is under pressure as the market is consolidating. A catalyst may be needed to break the consolidation, cue the central banks.
  • Watch for: FOMC, BoJ

Gold – A consolidation has delayed the trend lower   

  • As the March rate hike has become ever more priced gold has been in decline, however the political risk will help to support gold. A “hawkish hike” from the FOMC would drive the price lower, but support has started to form and unless the Fed disappoints, the outlook for gold remains pressured.
  • Momentum remains bearish and the market is trending lower. Support at $1194.50 now needs to hold but this still looks to be a consolidation within a downtrend. Resistance is sizeable overhead at $1220.
  • Watch for: FOMC, BoJ

Oil – US increase in shale supply is a big weight on oil price

  • The OPEC compliance with the production cut seems to simply be offset by increases in US production. The Baker Hughes rig count has been increasing for the past 8 weeks, whilst weekly EIA inventories have also continued to expand over the past couple of months. This is putting downside pressure on oil once more.
  • A downside break of the old $5 ranges now opens for new ranges, with WTI between $45/$50 and Brent Crude $46/$52.
  • Watch for: News on OPEC production levels, EIA Oil Inventories

Indices – 4 month uptrend now being tested

  • S&P 500 – With the FOMC ready to hike, Wall Street has consolidated. There is now support at 2352 which would complete a top pattern of 49 ticks if broken. However near term corrections would still be seen as a chance to buy. Momentum remains strong and the bulls are still waiting. A hawkish hike would drive the correction.
  • DAX Xetra – The DAX is beginning to break its 3 month uptrend but the support at 11,893 is holding and this is a consolidation, not a correction yet. Below 11,700 would confirm a breakdown and open a deeper correction.
  • FTSE 100 – With sterling weakness the outlook for the FTSE 100 remains strong. With a series of higher lows in place (the latest at 7264) the market remains positively configured and will do so whilst trading above 7200.

Economc Calendar

WATCH OUT FOR THIS WEEK

Wednesday 15th March

  • UK – Unemployment & Average Weekly Earnings
  • US – EIA Crude Oil Inventories
  • US – FOMC monetary policy, economic projections and press conference
  • New Zealand – GDP

Thursday 16th March

  • Japan – BoJ monetary policy
  • Switzerland – SNB monetary policy
  • Eurozone – Final CPI
  • UK – BoE monetary policy & minutes
  • US – Weekly Jobless Claims
  • US – Building Permits & Housing Starts
  • US – Philly Fed Manufacturing
  • US – JOLTS jobs openings

Friday 17th March

  • G20 meetings
  • US – Industrial Production & Capacity Utilization
  • US – Michigan Sentiment (prelim)

 

NEXT WEEK

Tuesday 21st March

  • Australia – RBA monetary policy minutes

Wednesday 22nd March

  • US – Current Account
  • US – Existing Home Sales
  • US – EIA Crude Oil Inventories
  • New Zealand – RBNZ monetary policy

Thursday 23rd March

  • UK – Retail Sales
  • US – Weekly Jobless Claims
  • US – New Home Sales

Friday 24th March

  • Eurozone – Flash Manufacturing & Services PMIs
  • US – Durable Goods Orders
  • US – Flash Manufacturing & Services PMIs

 


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