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Putting an End to Themes: Global Week Ahead

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There are noted trading weeks — ones where we mark the beginnings of stock market themes such as the beginning in a multi-year series of interest rate hikes, the start of a new presidency, or an inexorable turn in stock index price trends.

Then, there are the opposite of such trading weeks. These are weeks where we mark — sometimes in hindsight — the end of long-term themes.

This Global Week Ahead is the latter.

This week, we likely mark the end of a two-year-long Brexit ordeal, as it collapses under a vote in the U.K. House of Commons. We will more surely see the end of multiple years of “QE” in Europe. On Thursday, the ECB winds down its scrap of monthly bond buying which remains in place.

Perhaps, traders also foresee the end of Fed rate hikes — sooner than expected a few short weeks ago — as the U.S. Treasury yield curve inverts. This series of 25 basis-point steps began three years ago, in December 2015. Stress from a self-created U.S.-China trade war clearly hit domestic earnings and stock markets.

Do we shortly mark the end to this very long and winding U.S. business cycle? That’s the next signpost traders’ and investors’ actionable thoughts have headed.

That call looks to this economist to be premature, by at least six to nine months. However, those logic systems coded for major momentum share price shifts usually trade in front of them, about that length of time.

The following are five big underlying Reuters world market themes. These are most likely to dominate the thinking of investors and traders alike in the Global Week Ahead.

(1) Where Does the U.S. Treasury Yield Curve Go from Here?

With major parts of the U.S. economy visibly slowing, the U.S. risk-free Treasury market has reacted in a striking manner.

The 10-year yield is close to falling below the two-year yield, which would mark the curve inversion that has preceded every recession in the last 40 years. Signs of slowdown have persuaded markets to bet the Fed will slow the pace of rate increases next year.

But wait. Inflation is running at a 9-month high, annual wage growth a 9-1/2 year high and unemployment at a near-50 year low. So November inflation, due on Dec. 12th, will play into how Fed Chair Jerome Powell frames the path of future tightening.

So it remains to be seen where the curve goes from here. There are reasons to believe it can steepen and reasons to believe it will invert. Depending on how the incoming data looks — stagflation, anyone? — the Fed’s view on where neutral is and what its policy response should be in the coming months is far from clear.

(2) On Tuesday, the House of Commons Votes on Brexit

Buckle up for another wild week of Brexit mayhem on sterling and other UK-focused markets.

Britain’s parliament is — at the time of this writing, at least — set to vote on Prime Minister Theresa May’s Brexit transition deal on Tuesday, but the chances of it being approved don’t look good.

What happens then is... well, that’s the thing: there are multiple possibilities, all with very different implications.

A really heavy defeat would make it difficult for May to carry on. She has staggered through the last couple of years, taking direct hits from all angles, but this could finally bring her down.

Could that then lead to a hard Brexiteer taking the reins and ripping up the deal? Perhaps, and sterling won’t like that one bit. But it’s equally possible that whomever takes over would press pause on the whole process by withdrawing the so-called Article 50 notice. That could even raise the chances of a second public Brexit vote and that could send sterling soaring.

(3) On Thursday, the ECB Wraps Up Its “QE” Program

Thursday marks the end of an era for the ECB, which is set to formally announce the end of its three-year long, 2.6 trillion-euro monetary stimulus scheme.

For markets, that’s a done deal. What matters now is what the ECB does in the face of a weakening economy, global trade tensions, Brexit and Italy.

Policymakers have already been floating ideas to support the economy when QE ends. One suggestion is for multi-year loans to banks.

What investors appear more certain about is that the ECB will struggle to bring interest rates back up to zero percent, especially if a U.S. slowdown encourages the Fed to pause its rate-hike cycle. Money market pricing suggests investors expect roughly a 75 percent chance of an ECB rate hike in 2019. But that’s down from 100 percent just a few weeks ago.

(4) What Happens with the Global Oil and Commodity Prices?

So much for the U.S.-China trade truce.

If financial markets are any guide, the detente between Washington and Beijing struck over a steak dinner at the G20 in Buenos Aires barely lasted 24 hours. Fears of global trade war and economic slowdown are again driving investor sentiment.

On oil markets, that signals that a 30% price slump since October has little hope of reversing.

Oil has also had to contend with OPEC, whose failure to agree on output cuts accelerated the slump in prices, pushing the Brent below $60/barrel and WTI futures close to breaking below $50. The possibility of small cuts by the likes of Russia and Kazakhstan are unlikely to save the day, given the magnitude of market oversupply.

Commodities overall are in some trouble. Copper is near three-week lows, having lost around 15 percent so far in 2018, while most base metals are down a similar amount. And the Australian dollar — a good proxy for commodities, Chinese demand and world trade — was the worst-performing major currency in the world all week.

Without good news on the trade front, a respite is unlikely.

(5) What of the Latest Chinese Trade Data?

The United States has just reported its trade deficit hit a 10-year high in October, and its politically sensitive deficit with China surged to a record $43 billion. So markets will watch to see how China hawks in the Trump administration react to China’s trade data due for release.

The data should show whether China is carrying out promises to import more from America. It could well provide more grist for the mill — both for U.S. officials pushing for more reasons to punish China and for investors skeptical of the trade ceasefire.

The prospect of a Chinese growth slowdown is keeping investors edgy. So while trade contributes far less to the country’s GDP than it used to, there are other data points coming up too — credit growth and retail sales among others — which should show how badly the economy is hurting from the trade war.

Top Zacks Stocks—

Fujifilm (FUJIY - Free Report) :
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Key Global Macro—

China starts the week with its latest export and import data, due on the weekend.

On Tuesday, Brexit looks doomed.

On Wednesday, the CPI reading for November in the U.S.A. should decelerate. One analyst figures headline CPI inflation will fall from +2.5% y/y in October down to +2.1%. One major influence is the price of gasoline.

On Thursday, the ECB meeting takes center stage. But there is a Swiss National Bank (SNB) meeting too.

On Friday, we get U.S. retail sales as well.

On Monday, the U.K. gets its latest GDP growth rate. This is the day before the House of Commons voted on Brexit.

On Tuesday, Antad same-store sales (a retail sales proxy) in Mexico come out. They should go up to +5.5% y/y from +3.7% y/y.

The ILO U.K. unemployment rate comes out. It should stick at 4.1%.

South Korea’s unemployment rate is 3.9%, and we should see that stick at 2.9% too.

On Wednesday, Russia’s GDP growth rate comes out. It has been at +1.3% y/y.

The OPEC oil market monthly comes out. It’s full of great data and articles.

The CPI (ex-food & energy) comes out for the USA. Look for another +0.2% m/m rise, the same as last month.

On Thursday, there is an ECB monetary policy meeting in Frankfurt.

Brazil’s SELIC monetary policy rate should stay at 6.5%.

The SNB (Swiss National Bank) sight deposit rate is set. It has been negative at -0.75%. There is also an SNB monetary policy assessment.

Japan’s Tanken index comes out. It has been 19.0.

On Friday, Germany’s composite (at 52.3) and manufacturing PMI (at 51.8) get an update.

In comparison, the Eurozone manufacturing PMI is at 51.8. It gets a revisit too.

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