Written by Kyle Rodda - IG Australia
 

A historic week ahead? One does get the sense that some of the biggest risks plaguing financial markets -- over the course of several months, if not years -- may be coming to something resembling a definitive end. This isn't to suggest that extreme bouts of volatility, like those experienced throughout the month of October, have been put behind us; but that we are at least reaching a critical juncture for some of the biggest macro-economic challenges facing market participants. There's a cliché often quoted in markets, and that is that the only thing worse than bad news is uncertainty. Though the potential for heightened risk and volatility remains ever present amid a constantly shifting fundamental landscape, perhaps a closure to some of the bigger challenges hanging over global markets may prove enough (at the very least) to unshackle sentiment and support renewed bullishness amongst investors and traders.

US event risk: Just in the United Stated alone, several events pencilled into the financial market calendar this week jump-out as possible flash points for some of the big global economic issues. US mid-term elections on Tuesday give a gauge on the much-speculated-about mood of the American electorate and provide insight into what capacity US President Donald Trump will possess to exercise his policy platform in the future. The FOMC Meeting on Thursday will clarify whether the global share market correction experienced last month may derail the Fed's plans to hike interest rates again in December – and then a further three times in 2019. And the introduction of US sanctions on Iran on Monday (US time) will provide a firmer understanding of to what extent the removal of Iran from global markets will have on whipsawing oil prices.

European and Asian event risk: Looking beyond the trials and tribulations of financial markets in the United States, promising signs of major breakthroughs regarding Brexit and the US-China war have emerged. News reports over the weekend have warmed the idea that a Brexit deal could be negotiated, by some time before November 21. The reports suggested that Prime Minister Therese May is inching toward a deal that would allow the UK to remain in the European customs union -- possibly alleviating many of the deal-stalling concerns relating to the Irish border. Regarding the US-China trade-war, markets were bolstered by leaked reports -- since contradicted by some members of the White House -- that US President Trump, following his "long and very good” conversation with Chinese President Xi Jinping, had instructed his cabinet to draft a trade-deal with China

NFPs and US fundamentals: The prospect of resolutions to several of the world's major economic and geopolitical issues supported investor sentiment on Friday but proved inadequate in sustaining the week's share market turnaround in the face of the week's most significant economic release: US Non-Farm Pay rolls. The data reaffirmed that the US economy is still booming, printing a better than expected jobs-added-number of 250,000 (versus a forecast 190,000) -- a figure strong enough to maintain the unemployment rate at 3.7 per cent despite a climb in the participation rate. As is always highlighted, with the US economy having long been at nominally full employment, it was the wage growth number that preoccupied market participants: in what amounts to the strongest growth in wages since the GFC, the data revealed that workers earnings had climbed on an annualised basis by 3.1 percent.

The Fed and US rates: The strong US labour market numbers were a stark reminder to market participants that with the US economy running so hot, the subsequent signs of a build in price pressures may turn interest rate considerations from the US Federal Reserve from a matter of choice, to one of absolute necessity. Interest rate markets immediately reflected this reality, driving bets of a December rate hike from the Fed back around 80 per cent. The dynamic bid the US Dollar higher, and prompted a self-off in US Treasuries, pushing the yield on Benchmark US Treasuries 8 points higher to 3.21 per cent. US equity markets were dragged lower by way of virtue of this dynamic, led by the NASDAQ – which added to the losses sustained after Apple Inc. results contained a profit guidance downgrade – to close 1.04 per cent lower.

Global currency action: The reminder that US interest rates may hike in a steeper trajectory than expected pushed the EUR and Pound lower, which dropped below 1.14 and 1.30 respectively – before those currencies rebounded because of greater Brexit optimism. The solid gains made by the AUD/USD, which had itself climbed during Asian trade above 0.7240 on the back of the greater hopes of an imminent US-China trade deal, were unwound, dragging the A-Dollar back below 0.7200. The CAD fell in tandem with our local unit, though some of the losses with regards to the latter came consequent to the considerable fall in the price of oil to $US72.00 per barrel (in Brent Crude terms).

The Japanese Yen also declined, as did the Swiss Franc, proving the conviction behind the move into the Greenback. While the only currency that truly maintained its rally against the US Dollar was the Chinese Yuan, with that currency holding to 6.89 level on the belief that China's policy makers have what it takes to support and stabilise a slower Chinese economy. The greater confidence in China’s markets also galvanized a rally in emerging markets assets: the MSCI Emerging Market index leapt to its highest level in 30-days.

ASX200: SPI futures are now indicating a 5-point drop at the open for the ASX200, following a Friday that brought a mixed day for the ASX200, as well as the Asian region. Confidence that China has the fortitude to stimulate its way through slower economic growth, coupled with the prospect that a US-China trade deal can be reached, drove the CSI300 over 3 per cent higher, and the materials sector on the local share market one per cent higher. The materials space was primarily responsible for the ASX200's 0.1 per cent gain, only marginally offsetting the 0.38 per cent bank-led fall in the financials sector.

It will be a dichotomy that may dictate trade once more today and into the early stages of the weak, after auction clearance rates demonstrated further signs of weakness in the domestic property market. The potential softness in bank stocks, combined with several RBA-related event risks, and the still uncertain global backdrop, may test the positive price action witnessed in the ASX200 this week, which fought gallantly to close last week's trade above 5930 support/resistance, and display tentative signs of a recovery from October's market correction.