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Market Briefing
Week Ahead: November Rain

Karl Schamotta November 26, 2018

Risk appetite is rebounding in financial markets this morning – despite a renewal in tensions between Russia and Ukraine, continued political turmoil in the United Kingdom, and a downpour of economic events that should keep traders running from shelter to shelter through the week ahead.

European Central Bank President Mario Draghi will deliver testimony in front of the European Parliament this morning and is likely to provide politicians with reassurance that monetary policy will remain easy after the institution halts its asset purchase programme in December. As the country’s former central banker, Draghi will likely face questions on Italy’s budget battles with the European Commission but will try to avoid wading into the issue directly.

Instead, his comments on the European economy may be watched most closely – incoming data continue to weaken, lowering odds on rate hikes before Mr. Draghi’s term ends in October next year. In a less-than-promising sign, a report issued by the German Ifo Institute this morning indicated that business sentiment deteriorated for the third-straight month in November, suggesting that growth in the region’s manufacturing powerhouse continues to slow.

European Union leaders approved a treaty outlining divorce terms with the U.K., a milestone in Britain’s bid to extract itself from the bloc. Now, Prime Minister Theresa May has to sell the deal to skeptical lawmakers in Parliament.

Federal Reserve Chairman Powell will address the New York Economic Club in the middle of the week and will almost-certainly stick to the message that has been delivered over the last few months – that the central bank has reached its employment and inflation mandates, and rates will continue to rise in a gradual fashion. In outlining downside risks, the always-lawyerly Mr. Powell may highlight a slowdown in global growth and fading fiscal stimulus – but could suggest that noise emanating from the financial markets is unlikely to impact the monetary tightening trajectory – at least, until it affects the real economy.

Higher yields helped the dollar to finish last week as the winner in the reverse beauty contest that often dominates currency markets – but investors continue to doubt the Fed’s resolve – market-implied rates are discounting only one hike in 2019, against the three expected by the Federal Open Market Committee.

Presidents Trump and Xi are scheduled to meet at this weekend’s G20 summit, and markets will be on alert for any sign that trade relations could begin to thaw. In January, the United States is scheduled to raise tariffs to 25 percent from the previously-imposed 10 percent on $250 billion in Chinese imports, and investors are hoping that the two leaders will achieve a compromise solution that avoids this outcome. Beyond handshakes and singing kumbaya, meaningful progress seems unlikely – China cannot directly resolve the savings imbalance that gives rise to American trade deficits, and Trump’s secondary policy objectives are too ill-defined to result in verifiable action. A largely-symbolic commitment to opening up investment channels and buying more US-made goods looks most probable.

Canada, Mexico and the US are also expected to sign what most market participants are calling the “NAFTA 2.0” agreement. This will potentially clear the way for a reduction in steel and aluminum tariffs, but shouldn’t prove market-moving on its own.

Instead, the Buenos Aires summit could bring developments on the oil front – with Trump, Russian President Vladimir Putin and Saudi Crown Prince Mohammed bin Salman in attendance, management of an increasingly-vulnerable crude market will surely come up for discussion.

Oil plunged another 7.6 percent on Black Friday – before rising slightly last night after reports that Russia had seized three Ukrainian naval vessels off the Crimean coast. The United Nations Security Council and the North Atlantic Treaty Organization have convened meetings to discuss the situation, but with complex economic and political realities acting to restrain potential combatants in the pipeline-infested region, markets expect the situation to end in a compromise – one which doesn’t move prices on a long-term basis.

A slowing global economy, rapid growth in US output, and political constraints on Saudi Arabia have cut prices by more than 20 percent this year, and traders seem broadly convinced that the desert kingdom is unlikely to aggressively cut output in the face of opposition from American policymakers who are already angered by the killing of journalist Jamal Khashoggi.

This could change however – President Trump may be ideologically predisposed to enjoy lower oil prices, but members of his administration are acutely aware that a sustained period of downward pressure will unleash distributional effects on the American economy, hurting the business investment activities that help to support overall growth. An informal agreement that smooths the way for a 1 – 1.5 million barrel a day cut by the Organization for Petroleum Exporting Countries on December 6th seems increasingly possible.

Taken in sum, when it rains, it pours. A number of market reversals are possible in the coming days – so get out your umbrellas and have a great week!

Karl Schamotta
Chief Market Strategist

Counterparties: Background Reading

New York Times: The Land That Failed to Fail
VoxEU: Central Clearing of French Coffee Futures
New York Times: Trump’s Tariffs Haven’t Really Transformed Trade. Yet.
Washington Post: The Myth of Stagnant Incomes
Council for Foreign Relations: The Fed Is Tightening More Than It Realizes
The Atlantic: Is a Recession Coming?
Project Syndicate: Silent Inflation

Catalysts: Scheduled Data Releases

09:00  ***    EUR European Central Bank Speech, Draghi
13:30  **      GBP Bank of England Speech, Governor Carney, Greenspan

08:30  *        USD Federal Reserve Speech, Clarida
09:00  *        USD House Price Indices, September
10:00  **      USD Consumer Confidence Index, November
14:30  *        USD Federal Reserve Speech, Bostic, Evans, George

00:00  **      MXN Banxico Inflation Report
02:00  **      GBP Bank of England, Financial Stability Report
08:30  **      USD Advance Goods Trade Balance, October
08:30  **      USD Gross Domestic Product, Q3 (Second Estimate)
08:30  **      USD Personal Consumption Expenditure, Q3 (Second Estimate)
10:30  **      USD Department of Energy, Weekly Inventories
12:00  ***    USD Federal Reserve Speech, Powell

01:45  *        CHF Gross Domestic Product, Q3
02:45  *        EUR French Gross Domestic Product, Q3
03:55  **      EUR German Unemployment, November
05:00  *        EUR Euro-Zone Consumer Confidence, November
08:00  **      EUR German Consumer Price Indices, November
08:30  **      CAD Current Account Balance, Q3
08:30  ***    USD Personal Consumption Expenditure, October
08:30  **      USD Weekly Jobless Claims
14:00  ***    USD Federal Open Market Committee Meeting Minutes, November
18:30  **      JPY Employment, October
18:30  *        JPY Tokyo Consumer Price Indices, November
20:00  ***    CNY Purchasing Manager Indices, November

05:00  **      EUR Euro-Zone Consumer Price Indices, November
08:30  ***    CAD Gross Domestic Product, September
09:00  *        USD Federal Reserve Speech, Williams
09:45  **      USD Chicago Purchasing Manager Index, November
13:00  **      USD Baker Hughes Weekly Rig Count

Note: Asterisks indicate our preliminary estimate of the potential market impact associated with each event. One asterisk indicates an event with the lowest, two for a moderate impact, and three for the highest expected impact.

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