The Fed’s shift to a relatively dovish tone is undoubtedly good news to risk sentiment but not enough to keep bulls in control. Many catalysts may support or end last week’s market recovery including earnings announcements, macro data, the U.S. government shutdown, and Brexit vote.
Data released earlier this morning from China was not encouraging. The world’s second-largest economy reported the biggest monthly fall in exports in two years, confirming beliefs that the global economy is heading into a slowdown. Increased tariffs by the U.S. are to be blamed, but only partially because Chinese exports to the rest of the world also declined. As a result to the surprisingly negative figures, Asian equities fell and futures pointed to a lower open for Europe and the U.S., while high beta currencies like the Australian and New Zealand Dollar experienced the biggest falls amongst major currencies.
Investor appetite to equities will be heavily tested this week as Corporate America begins to announce earnings results for Q4. Citi Group is the first major U.S. bank to report results today. JP Morgan and Wells Fargo will follow on Tuesday. Goldman Sachs and Bank of America will be announced on Wednesday, while Thursday will be Morgan Stanley along with Netflix. Investors need to keep an eye on loan growth figures as they reflect confidence in the overall economy, any increase in provisions, M&A activity, and how the shutdown may impact the real economy in the eyes’ of the banks.
The Brexit vote is likely to capture most of the headlines this week. Tomorrow the House of Commons is set to vote on UK Prime Minister Theresa May’s Brexit deal. It is expected that the bill will be voted down, but this won’t be the most significant factor influencing the Pound’s direction, it’s what will happen next. Are we going to see a no-confidence vote in the government? Or another attempt by Theresa May to secure concessions from the EU? Will there be an Extension of Article 50? Or even extreme scenarios such as a new general election and a second referendum? Each of these scenarios will have a different impact on the Pound. As of now, investors seem to be on wait-and-see mode as Sterling is holding against the Dollar near 1.2850.
