A week to test the rebound

Summary

Is risk appetite rolling over again?

Doubts remain

In a week with a relatively quiet macroeconomic calendar, investors will have few distractions from deciding whether last week’s stock market stabilization will hold or fold. The dollar is beginning to look resilient again after the latest blow-out NFP and compelling annualised earnings growth. Washington and Beijing have ventured to the conciliatory side of disputative comments. But Presidents Trump and Xi have not deviated much from notable utterances of the last few months and the G20 meeting at which ‘ice-breaker’ talks are planned is over three weeks away. Mid-terms, a White House motivation for dangling a rapprochement, are uncoincidentally closer. In the meantime, Brussels’ procedure is grinding forward, leaving Italy’s budgetary developments in limbo, though fallout from a bruising summer continues. Goldman’s bank downgrade was followed swiftly by news of a confidence vote being called to ensure a security bill survives low-level coalition ructions. 10-year BTP yields are joining the rebound in U.S. benchmark yields. Greenback resilience is present and correct.  Add sterling’s continuing Brexit fog and the euro’s monetary and political trials and the dollar is continuing the up leg commenced in September. Payrolls catalysed a sharp Dollar Index rejection near October lows, to keep DXY’s September rising line quite intact. The dollar’s rebound against the yuan looks similar on the charts after a terrible set of privately sourced Chinese service-sector prints. None of this necessarily invalidates last week’s apparent turning point in risk appetite. But doubts remain about whether investors have truly habituated to the years’ bugbears. Uncertainty about the markets’ tolerance of lingering challenges needs to be dispelled to help corroborate last week’s stock market floor.

Technical analysis chart: Intercontinental Exchange U.S. Dollar Index – daily intervals 05/11/2018 13:59

Source: Refinitiv/City Index

ISM data, China reserves and trade

A short hiatus is setting in ahead of Tuesday’s U.S. voting. Before then, light position taking suggests holding patterns across asset classes. Unusually late monthly U.S. service sector ISM indices will nevertheless be of interest. Whilst their customary role as a leading indicator for payrolls is nixed, an unequivocally strong Employment Index should aid dollar impetus. The reading was 62.4 in September, the third-consecutive increase since June ended a decline from the beginning-of-the-year’s 61 peak. China will keep the markets’ interest this week with FX reserves due over the next 24 hours (though seldom scheduled precisely) and trade figures on Thursday. Beijing’s currency holdings fell more than expected in September, albeit by a negligible $5bn to $3.105 trillion. Evidence linking the slip to the current climate is circumstantial. The regulator stressed reserves would be stable despite renminbi fluctuations. Whatever the causality, reserves could also fluctuate and are unlikely to be ignored by yuan traders. Export data will be examined for further signs that post-dispute resilience reflected a beat-the-tariff ramp. August’s 14.5% growth rate was the second highest this year, yet dollar-denominated imports slowed to a similar 14.3%, their weakest since March. Consensus is rising to catch up with exports relative to economists’ too-low forecast for August. The expected 11.6% rise in October still looks light. Import consensus is largely flat against the last actual.

Mid-terms: which nudge of the balance?

For U.S. mid-term elections, the main watch is which incremental move of the balance will prevail. A stream of polls consistently points to Democrats regaining House control, in keeping with the norm for non-White House incumbent party fortunes. There is a mild statistical bias showing the stock market favours a Republican administration alongside a GOP-controlled House, but the dollar’s reaction could be more telling. A Dem. swing in the House of Representatives would pave the way for increased investigations. Political retaliation could then point to renewed fiscal disruption and more uncertainty about the administration’s fiscal agenda. These elements could find their way into stock market sentiment too, though probably well after this week.

Wanted: timely UK growth rebound

Preliminary UK quarterly GDP readings are another macroeconomic focus for the week. Rising optimism that was evident across OBR and BoE forecasts is reflected in improved Q3 market expectations. Growth of 0.6% is the consensus after 0.4% in Q2, the weakest in five years. Continued improvement in the recently completed quarter is required by sterling. Better growth readings would provide as solid a dovetail as possible with pricing that tracks the Bank rate. The construction sector played a large part in Q2 weakness though Markit/CIPS’s better than forecast PMI outcome for the sector, on Friday, could suggest the bottleneck has eased.