So, what do we know?
(A forex, index, and commodity market review)
Global markets continue to believe and expect the conflict between Israel and Hamas to be contained which helped US and other international equity indices eke out gains last week. The tech sector was particularly strong with the NASDAQ rallying over 2% Friday to post a 2.74% weekly gain.
Weekly change (amount change and percentage change on the week)
FTSE Unchanged
DAX +130 +0.86%
DOW +147 +0.43%
S&P +50 +1.14%
NASDQ +414 +2.74%
NIKKEI +110 +0.33%
Hang Seng -562 -3.15%
US and global markets believe that the conflict in the Middle East will not escalate following the move three weeks ago by the US administration to send two aircraft carrier battle groups to the Eastern Mediterranean to deter Hezbollah in southern Lebanon. Israel has also made thinly veiled against Hezbollah should it engage in any serious military action.
Whilst the humanitarian cost is significant in Gaza, as Israel seeks to destroy Hamas, the lack of any significant escalation in the conflict has enabled markets to recover some lost ground. The lightning rods for global angst, such as the US Dollar and Gold, have seen initial gains whittled away whilst equities have continued to rebound from the October 7th atrocities inflicted by Hamas on Israel.
Ratings agency Moody’s announced Friday afternoon after the markets had shut that it had lowered its outlook on US debt to negative from stable although it did not lower its triple A rating. The agency said that the “US’s formidable credit strengths continue to preserve the sovereign’s credit profile.” What is a problem for the US , aside from the rapid rise in bond yields which makes it more expensive for all governments to service their debt, is the political angle. Congress was engulfed in turmoil when the previous Speaker in the House, Kevin McCarthy, was ousted by Republicans on the right of his party who were enraged by the deal with Democrats to continue funding the government. These political considerations are more relevant to the markets, which regard the whole political system as dysfunctional which is making the job of addressing and managing financial issues more uncertain. Whilst the news from Moody’s has not resulted in any major market reaction overnight, its
highlights the fact that the previous extension expires this week and that could well cause a market reaction if not resolved.
In the UK, GDP data released Friday confirmed that the UK economy failed to grow in the third quarter although the data of was slightly better than the -0.1% growth expected. Economists expect the UK to avoid a recession as the economy is expected to experience very modest growth in Q4. Compare this to US Q3 GDP data released in late October which reported growth at 4.9%, far stronger than anything in the UK or Eurozone.
EURUSD -0.43 -0.40%
GBPUSD -1.523 -1.22%
USDJPY +2.15 +1.44%
The US Dollar recovered from the profit taking experienced the previous week, to post modest gains versus other majors. The interest outlook appears to rule out any hike this year in the one remaining Fed meeting. However, the extent to which rates remain determine the US Dollar’s path over the medium term. It is still possible the EURUSD rate could hit parity sometime in the next few months – typically seasonal factors in the New Year tend to favour the US Dollar.
Gold -55 -2.76%
UK OIL -3.54 -4.16%
US OIL -3.4 -4.21%
Gold continues to give up ground that it gained following the atrocity perpetrated by Hamas on Israel on the 7th of October. The US Dollar also posted gains which also pressured Gold, which had benefited from further central bank buying, most notably by China.
Oil continues to struggle as hedge funds unwind bullish bets following the start of the middle east conflict. Expectations were that that oil supplies would be hit as the war between Israel and Hamas escalated. The prosect of $100 per barrel looks some way off now but the situation could change rapidly if Hezbollah ignored the warning from the US.
What don’t we know….yet?
(What traders need to look out for in the week ahead)
Inflation is the focus this week with CPI data out in both the US and the UK. We also have UK employment data and UK retail ahead of the key Christmas trading period.
Monday
No key data to report
Tuesday
UK Claimant count and average earnings. Whilst the employment market continues to soften, the average earnings remains well above inflation now. Claims expected to be 15K, average earnings at 7.5% - well above the expected inflation reading of 4.7%. GBP sensitive.
US Core CPI, inflation reading. Expect core prices to increase +0.3% on the month, a yearly rate of 4.1% - stickier than hoped for by the FED. The headline is expected at +0.1% giving an annual rate of 3.3%-3.4%. US Dollar and US assets sensitive to this release.
Wednesday
China Industrial production and retail sales. Steady. On a day when Biden is meeting Xi Jinping at the Asia-Pacific Economic Cooperation forum in San Francisco. An interesting contrast between the two economies.
UK CPI inflation data. Expected at 4.7% , last at 6.7%. Will the rate fall to 5% or below and hit Rishi Sunak’s target. Likely to do so because of the base effect which sees prices rises from over year ago drop out. Unlikely to change the MPC interest outlook. GBP and UK assets sensitive to this release.
US Core PPI. Expected at +0.3%, same as previous month.
US Core retail sales. Slight pullback from last month’s +0.6% reading.
US Empire State Manufacturing Index. The manufacturing sector is picking up gradually with a slight improvement to last month although still below zero, as it has been in all but two months this year.
Thursday
US Philly manufacturing index. Not expected to improve. -10.4 versus -9.0 last month.
Friday
UK Retail sales. +0.3% on the month. Following on from last month’s worse than expected fall of -0.9%. Volatile number that is as volatile as the UK weather.
Eurozone Christine Lagarde speaking at the Frankfurt European Banking Congress. The usual warnings about rate policy hints apply.
US Last day for Congress to agree on a new debt ceiling. A dysfunctional system for managing the US’ finances.
