Weekly Game Plan 15 Oct 18

As we venture further into Q4 2018, expect the markets to be driven more by politics than else. The US elections will be the main focus, but don’t dismiss the outcome of the Bavarian election (which is showing the usual anti-establishment trend), the Italian budget issues, the EU/UK Brexit negotiations and the US-China trade debate. These are all political developments that are creating uncertainty and as such, expect volatility and perhaps adopt a shorter-term stance for the time being.

Themes for the Week:

Tomorrow the Italian government must submit its budget to the EU, which will give a negative opinion and ask for a revision of the budget before the end of October. The Italian authorities will then have three weeks to comply with the request and the EU will give its final judgement at the latest by end-November. If Italy does not comply, the EU could launch an Excessive Deficit Procedure (EDP) against Italy, maybe as soon as the beginning of 2019. All this should produce a new leg of volatility in Italian debt as it raises the risk of an anti-EU backlash from League leader Salvini and Five Star leader Di Maio.

The markets will have to price in more political uncertainty in Germany after exit polls project a broad humilaition for Angela Merkel’s allies. Just how bad this will be depends on whether anyone from Merkel’s coalition steps down (Seehofer?). Remember that Germany has always been the leading country in Europe. To see political fragmentation there is a big warning sign for investors. Expect pressure on the Euro and on the Dax.

The expectations are that EU leaders will yield a deal on Brexit for PM May on the 18th. If the outcome is positive, investors could unwind more of their short sterling bets, setting the currency firmly on the road to recovery. But with less than six months to go before Britain leaves the bloc, fears about the Irish border issue will still hound the pound.

US Earnings: Fifty -five S&P500 firms release earnings including names like Netflix, eBay and twenty-six financials including BofA, BlackRock, Morgan Stanley, Goldman Sachs, US Bancorp, BoNYM, Amex and State Street. While it’s very early, the Q3 earnings season is shaping up rather nicely with about 90% of a small sample to date beating analysts’ earnings expectations including the early read on key financials.

FInally, the equity market sell-off. Is it over? Perhaps. However, the main issue is another: that we are nowhere near a bear market. Ups and downs like this may even become the norm as we head into the US Elections. But more on this in this months’ webinar, which will cover the US elections and will be held next week.

Data in the week ahead:

  • US Retail Sales
  • Bank of Canada’s Business Outlook Survey: influential for BOC watchers.
  • NZD CPI
  • RBA Minutes
  • UK Employment Change
  • UK CPI
  • FOMC Minutes
  • AU Employment Change
  • UK Retail Sales
  • CNY GDP
  • CAD CPI & Retail Sales: also influential ahead of the BOC’s decision next week.

On the Radar:

There aren’t many signs from the currency market going into the week, and the only sign (Jpy strength) may dissipate depending on what global equities do. So it’s quite difficult going into the week. GbpJpy (short below 147.00) or EurJpy (short if the Bavarian elections cause havoc) may be two ideas. But for now the game is elsewhere: equities will be the main focus.

A short-terms stance will be more adequate this week, especially with all the headline risk and event risk due.

About the Author

Justin is a Forex trader and Coach. He is co-owner of www.fxrenew.com, a provider of Forex signals from ex-bank and hedge fund traders (get a free trial), or get FREE access to the Advanced Forex Course for Smart Traders. If you like his writing you can subscribe to the newsletter for free.

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