Week Ahead: Geopolitics to Dominate Agenda Again
Fawad Razaqzada May 17, 2019 12:32 PM
As has been the case this week, investors will probably pay less attention to the upcoming data releases, and more so to incoming headlines regarding the US-China trade spat, rising US-Iran tensions and Italy’s budget row with the EU, and, of course, Brexit.
This week, we have seen big moves in the stock markets, pound and emerging market currencies, with China’s yuan bearing the brunt of the sell-off amid growing concerns over trade wars. Next week, volatility should remain elevated, providing plenty of potential trade setups. As has been the case this week, investors will probably pay less attention to the upcoming data releases, and more so to incoming headlines regarding the US-China trade spat, rising US-Iran tensions and Italy’s budget row with the EU, and, of course, Brexit.
The renminbi extended its drop on Friday as trade tensions escalated. China’s state media indicated a lack of interest in resuming trade negotiations with the US, while China’s Ministry of Commence has stated that there has been no information on any US officials heading to Beijing for fresh round of trade talks. Yet despite this, US stock markets managed to regain their poise after a weaker open and following a sizeable recovery earlier in the week. The markets were thus set to end the week on a positive note, although ahead of the weekend, we wouldn’t be surprised to see some profit-taking.
The US-China relationship has turned volatile and markets very headline-driven. So, it will be worth following the news and Donald Trump’s twitter handle closely in order to be up to date with the latest trade headlines next week. Any further deterioration in the talks could trigger a stock market sell-off and more pain for emerging market currencies.
USA vs. Iran
Meanwhile in the latest sign of frustration with the US, China’s Foreign Minister said Beijing is in 'firm opposition' to unilateral US sanctions against Iran. The US has moved more firepower into the Persian Gulf, although Trump is against military action. If the US and Iran situation boils over, this could have ramifications on oil, stocks and commodity dollars.
Brexit cross-party talks collapse
Talks between Labour leader Jeremy Corbyn and Prime Minister Theresa May ended without an agreement on Friday, meaning that the Brexit impasse carries on. Mr Corbyn said there was "increasing weakness and instability" in the Government, while Ms May blamed the lack of a "common position" within Labour over a further referendum. The PM, who has promised to set a timetable for her departure following another parliamentary vote on her EU Withdrawal Agreement Bill in the week beginning 3 June, indicated she would now put forward choices to MPs on Brexit to see what option commands a majority. But Tory Eurosceptic MPs have already told the PM to quit now after compromise talks with Labour collapsed, as it is likely that her deal will be defeated again.
The pound is severally oversold, and we wouldn’t be surprised if it staged a mini short-covering recovery early next week. Ultimately, though, the path of least resistance is to the downside given the increased offs a of a hard Brexit. But if the prospects of a second referendum rises, then we could see a sharp recovery in the GBP/USD exchange rate and other pound crosses.
Also worth watching
Australia's Federal Election is taking place on Sunday, which could have implications for the Aussie dollar and local equity prices. For more information, click HERE. Meanwhile there was some relief for Canadian dollar and Mexican Peso on Friday as the US looked set to remove steel and aluminium tariffs on Canada and Mexico, according to Bloomberg. If confirmed, these currencies could find some much-needed support in early next week.
Key fundamental events
The bulk of next week’s key data will be released on Wednesday, when we will have retail sales from New Zealand and Canada, as well as UK CPI and the FOMC’s last meeting minutes. Eurozone manufacturing and services PMIs will be published on Thursday, providing us with the latest snapshot over the health of the ailing Eurozone economy. The European Parliamentary Elections will also start on Thursday and the results will be known on Sunday.
Featured chart: USD/CHN
With the US-China trade talks dominating sentiment at the moment, the USD/CNH is our featured chart. Following the extend rally, rates do look a little overstretched, but we think a new high for the year above 6.98 is still possible in early next week.
Source: TradingView and FOREX.com
Disclaimer: The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to Forex.com or GAIN Capital refer to GAIN Capital Holdings Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.