Financial Markets Look Ahead: Week of November 5, 2018
The last trading week provided some comfort to investors: markets moved up for three consecutive days with some conviction, only to get spooked by Apple’s weak guidance on Thursday. The Nasdaq was down 1% on Friday, ignoring all the good news ranging from non-farm employment data to wage increases. Let’s look at some of the macros before attempting to forecast what might happen in the markets this week.
While the US midterm elections will certainly take up a large chunk of everyone’s mindshare, I don’t expect election results to meaningfully impact the markets in the longer term, although there might be some increased volatility in the markets in the coming weeks. At the moment it appears that Democrats may win a simple majority in Congress, but it is unlikely they’ll have control of the Senate. This situation is unlikely to change President Trump’s style, rhetoric, or priorities — if anything, he may double down on his current course of actions. As a result, I expect US markets to gyrate based on his priorities and pronouncements.
I’m particularly interested to know — and expect to find out after the elections — his stance on the ongoing trade wars. I’ve assumed for a while that President Trump is using the trade war with China for electoral gains. But what if I’m wrong? What if he really wants to bring China to its knees? China — whose economy is already under pressure from multiple fronts, reported its worst quarterly GDP growth rate in nearly a decade last quarter (6.5%) and reported a manufacturing Purchasing Managers’ Index (PMI) of 50.2 for October, down from 50.8 in September. Although China is taking corrective steps such as improving liquidity, it is not yet clear that these actions will stave off a further slowdown. Any adverse actions at this time will ultimately be a lose-lose strategy, and now is certainly not the time to go after China, even if that is what he wants.
Meanwhile, the trade wars are affecting both the US and China. Although tariffs have been in place for more than a month now, with the clear objective of reducing the US trade deficit with China, the trade deficit has risen since July and reached $54 billion in September.
The dollar closed the week at 96.46, above the previous week’s close of 96.37, but after hitting an intra-week low of 95.99 on Friday morning, possibly because of comments from President Trump regarding a “good conversation” he had with President Xi Jinping of China. This may have been interpreted as a signal of resolution of the trade war. The dollar recovered later in the day when senior administration officials denied any quick resolution of the dispute. The 10 year US treasury yield jumped from a low of 3.059 to close at 3.220. With this, the yield on the 10 year is up 34% year to date. Gold closed at 1234.60 after a volatile week and I expect it to move sideways this coming week.
The Iran issue remains largely unresolved. However, the US last week granted oil import exceptions to eight countries. And as I predicted, the Saudi crisis is fast receding in the background. I don’t expect any headwinds for oil in the coming week, and prices should remain subdued. Any price movement is likely to be driven by dollar prices as opposed to any fundamental supply/demand concerns — that said, the general global economic slowdown I’ve alluded to above may weigh on oil prices in the medium term. For crude oil next major support is at 60.14
As for the market outlook for the coming week, I don’t expect the US midterm elections to have much of an impact on the markets. The robust economic data from last week, including non-farm payroll, wage increases, and consumer confidence suggests the US economy to continue to grow for some time, even though PMI came in lower at 57.7. The increase in bond yields and overall strength of the economy will likely lead to the expectation of a rate increase by the FED in December and may even strengthen the dollar further. Last week the S&P broke a falling trend line, then moved up to 2741 and corrected back to 2723 with a bearish bar reversal. It may re-test 2690 and 2529, and on the upside may face resistance at 2811. For now, market movement will largely depend on how President Trump and his administration takes forward the trade discussion with China. If serious efforts are made to resolve the issue the markets across the world will bounce back and the US dollar will reverse its direction, which will be a great relief for emerging markets.
