The following is a partial summary of conclusions from our weekly fxempire.com analysts' meeting in which we share thoughts and conclusions about the weekly outlook for global equities, currencies, and commodity markets. The following is an overview of the week's likely top market movers of all major global asset markets: global stocks and the leading stock indexes, forex, commodities, and bonds.
How To Anticipate The Week's Top Market Movers
In our 2013 forecast last January, we concluded that the continued rally in risk assets would most likely depend on two things:
- Whether or not central bank stimulus would continue, and continue to work propping up asset prices
- Whether or not there would be any systemic risks that scare markets. The EU was and remains the most likely source of that, so we explicitly noted the importance of the EU crisis remaining dormant.
This thinking continues to shape our outlook, as shown in the below forecast of likely top market movers for the coming week
ANYTHING INFLUENCING EXPECTATIONS ABOUT STIMULUS
Markets believe that the only thing sustaining risk asset prices is central bank stimulus. Therefore the market moving potential of anything depends greatly on
- Its perceived influence on central bank monetary policy.
- The size of the stimulus program, which is typically a function of the size of the related economy. Therefore something that influences the Fed, ECB, or Bank of Japan is more market moving than data that might move the central banks of smaller economies. The big exception to this rule applies to traders of the smaller economy currencies or those seeking to buy assets denominated in these currencies. Thus NZD traders, or those seeking to buy stocks, bonds, real estate or other assets in the U.K., New Zealand or Australia would obviously be more interested in events that would influence policy for the central banks of these nations.
There are two kinds of events that influence market consensus on central bank policy:
- Releases of economic reports believed to be especially important to the Fed, ECB, PBOC, etc.
- Explicit or implied messages from senior central bank officials
With that in mind, here are the top events to watch that could influence the leading central banks' policies.
The Fed: Retail Sales, FOMC Both Take On Added Importance.
Even if it starts tapering QE, it can dampen rising bond rates via "forward guidance" about not raising them until economic growth and jobs data meet higher standards than previously used.
This means 7 speeches by FOMC officials (at least one per day) from Monday to Friday (EST), and the release FOMC minutes Wednesday, will have market moving potential if they provide any kind of surprise, pro or anti- QE taper. See any good economic calendar, such as this one.
It also means that any top-tier data thought to influence their thinking also has market moving potential if they provide any material surprises. The list includes:
- Wednesday: U.S. monthly retail sales, existing home sales
- Thursday: Monthly PPI and flash Philly Fed manufacturing index and weekly jobless claims
Of special significance this month:
The retail data takes on particular importance because the big November 7th advanced GDP beat was mostly due to better than expected inventory buildup, and there was considerable disagreement on whether that was a bearish indication of slowing sales or a bullish sign of retailers anticipating increased demand. This Wednesday's retail sales data should help settle the issue. If sales prove weak (and early indications aren't great) then it's more likely the boost to GDP from inventory could be reversed out of Q4 advanced GDP as business order less due to slack demand.
If consumer spending drops for the second straight month, policymakers are unlikely to support a December. Other consumer spending data show October retail sales last month were weak. Johnson Redbook reported a 1.2% sales drop from September. The International Council of Shopping Centers reported a 4.1% year over year gain in chain store sales, only a slight increase from the previous month's 4.0% increase.
FOMC Meeting Minutes
These provide the latest insights on any shift in Fed taper timing at a time when this is the biggest market focus. Most FOMC officials favor earlier tapering, so the Fed meeting minutes may be less dovish, but that would likely influence taper speculation if October retail sales turned positive. Otherwise markets would assume the Fed isn't tapering this year.
While we don't think the odds are high for any start to a QE taper before March 2014, markets appear to now believe that there can be tapering without an automatic spike in rates because the fed can use forward guidance to dampen rate increases. Note the evidence of rate hike fears easing:
- 30-year mortgage rates have dropped about 40 bps of their 120 bps rise from their 12 month low leading up to the September meeting
- December 2015 Eurodollar futures are at about the same level as they were prior to Chairman Bernanke's May 22 testimony that originally hinted at a coming QE taper.
So if data continues to surprise strongly to the upside, the Fed may feel more comfortable with slowing asset purchases earlier. We don't think it will do so, for reasons cited here, but continued strong US data probably would, at minimum, raise expectations for an earlier taper. That would pressure stocks and other risk asset, but benefit the USD and possibly the JPY too.
The key data will be the PMI figures, followed by the IFO and ZEW. These give the market its first reading on the EZ's performance in November. Economists expect improvements all around and if they are correct, that would be bullish for stocks and the EUR, both because of the boost to risk appetite, and because the EUR would benefit from reduced risk of imminent additional easing measures.
In any case, the ECB is no more likely than the fed to do anything soon, unless something disastrous happens, if for no other reason than to give the Germans some time to cool off. They're seriously unhappy at the dovish drift in ECB policy, after both a rate cut and senior ECB official Peter Praet's remarks in the Wall Street Journal about possible QE measures.
As we discussed here, however, the most potentially big market moving news (if not this week then in the coming weeks) is the state of negotiations over a mechanism to deal with banks that fail the ECB's bank stress tests due to start in early 2014. Unlike past attempts to deal with the EU's solvency issues, the usual lend and pretend is unlikely to work for long. . See our full special report, ECB Bank Stress Tests: Catalyst Of The Final EU Crisis?
Technical Picture: Uptrends Continue, Can Absorb Some Damage
As discussed in detail here, US and most major international stock indexes held steady or continued higher last week, so the prevailing the multi-year uptrends remain entrenched. That upward technical momentum influences this week's action because markets are biased to pay more attention to news that goes with the trend than news that contradicts it. In other words, until markets are convinced the rally is over-extended, it takes a more sustained flow of bearish news to reverse the uptrend.
That was true even in the pre-QE era, and is all the more so now.
DISCLOSURE /DISCLAIMER: THE ABOVE IS FOR INFORMATIONAL PURPOSES ONLY, RESPONSIBILITY FOR ALL TRADING OR INVESTING DECISIONS LIES SOLELY WITH THE READER.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.