Wall Street ended last week on a positive note as investors digested top banks earnings and recent economic data suggesting a rate lift is unlikely in 2015.
Major U.S. indices managed to rally for the third consecutive week, as bad economic news continued to be interpreted as good news to markets as long as the Fed remains on hold. The U.S. currency was the victim of that trade, with the dollar index dropping towards 93.80 on Thursday “lowest since 28-Aug” before taking a V-shape recovery, closing at 94.54 on Friday.
The dollar index dropped more than 2% in the past 15 days and 5.8% from the highs recorded in March, raising a question whether the greenback strength reached its peak this year. The recent dollar weakness is clearly based on interest rates expectations and as Ms. Yellen missed the opportunity to hike in September, markets do not believe it coming neither in October nor in December.
The US slowdown has drawn the market to the increasingly prolonged debate between Fed hawks and doves. A Hawk win requires strong data releases from the U.S. economy and unfortunately, none of next week releases are tier-one data. We will be looking at a few housing markets reports (NAHB housing market index, building permits, housing starts, and house prices), manufacturing PMI, and the usual initial jobless claims. None of the releases is likely to change the balance of powers in Feds debate so expect the dollar to trade on outside events.
Monday’s Chinese third quarter GDP is probably the most awaited event for the week as the global economy is being challenged by weaker activity, low inflation levels, and all central bankers pointing towards emerging markets as source of slowdown. Economists expect the rate of growth to fall to 6.7% in the third quarter, the slowest growth since the depth of the financial crisis. China had many attempts to stimulate the economy through cutting interest rates and required reserve ratio to encourage business activities through lending and most probably further action from policy makers would be announced in the foreseeable future. Although reports will not show dramatic slowdown, a print of 0.1% lower is enough to trigger a wave of risk aversion supporting safe haven currencies such as the Yen. Commodity currency traders especially the Aussie and Kiwi should be watching the report closely taking into consideration that China is the biggest trading partner for Australia and New Zealand.
Thursday’s European Central Bank meeting is the major risk event for the Euro. Traders have been ignoring fragile economic releases from the Eurozone area, particularly the deterioration seen in Germany as they positioned their trades on interest rates expectations. Since mid-July the EURUSD appreciated by 4.8% from 1.0830 to 1.1346. This is not good news for ECB policy makers as stronger Euro would put more pressure on prices and pull growth even lower. On the interest rate side nothing expected to change, however expanding the asset purchase program or a strong hint to do so would put a cap on recent Euro rally.
The Pound had been very volatile last week with mixed bag of economic releases. Inflation rate again dipped below zero in August, pulled down by cheaper fuel prices, on the other hand unemployment declined to 5.4% from 5.5% and wages slowed to 2.8%. How do these reports translate into consumer spending is probably what we should be focusing on. Thursday’s retail sales figure could provide a better signal on whether the GBPUSD may rally above 1.55.
Third quarter corporate earnings season picking up next week with slew of large companies on the radar. Here is the list of top companies to announce:
Monday: IBM, United Technologies, Morgan Stanley and Halliburton
Tuesday: Verizon, SAP, Costco, Lockheed Martin and Bank of NY Mellon and Yahoo!
Wednesday: Coca-Cola, Boeing, American Express, EMC and General Motors
Thursday: Alphabet (Google), Microsoft, Amazon.com, Roche Holding, AT&T, P&G, McDonald’s, 3M and Caterpillar