• US jobs report could add to abundance of positive data this week;
  • Higher rates raise more concerns for emerging markets
  • Was Amazon commitment on wages a sign of an end to low earnings growth?
  • GBP jumps on EU optimism of a Brexit deal.

Equity markets are trading in the red again on Friday, with bond yields continuing to edge higher as investors price in a more aggressive tightening from the Federal Reserve and possibly others.

There’s been an abundance of strong data points out from the US this week which strongly supports the view that the economy is booming at the moment. Combined with comments earlier in the week from Fed Chairman Jerome Powell, all of this points to higher interest rates for the US – much to the fury, I’m sure, of President Donald Trump – and this is quickly being reflected in the bond markets.

Perhaps there is an element of overly aggressive knee jerk reactions occurring here and possibly even some stops being triggered along the way, further exacerbating the problem, but this is taking its toll on stock markets. That may be a reflection of some portfolio rebalancing or a natural response to rapid increases in yields prompting some profit taking, but we are seeing further declines in Europe and Asia already and US futures are also a tad lower.

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The sell-off in commodity stocks is playing a big part of the declines, which may simply be a reflection of the risk-off tone or concerns about growth in emerging markets given the growing number of countries that are coming under the spotlight for all the wrong reasons – with India attracting particular attention this week. There has long been concerns about the impact of US rate hikes on the region but until it starts to drag more on the global economy or offer a much greater risk for the US, I don’t expect it to deter the Fed from going about its business.

The US jobs report today may offer another opportunity for traders to get excited about higher interest rates and trigger another wave of selling, with expectations ahead the release being quite high. The ADP number on Wednesday did nothing to temper expectations and if we get an NFP number in line with that, combined with another drop in the unemployment – taking it to an 18 and a half year low – we could see further gains for the dollar and perhaps a little more risk aversion into the weekend.

As always though, the most important number in the release will be the earnings number given that a tight labour market without wage growth raises significant questions about hidden slack in the economy. In a week in which Amazon has promised to raise its minimum wage and urged others to follow though, we may not have to wait long for that to follow and I think a wage growth number starting with a three – not happened since before the financial crisis – could get people quite excited.

In the UK, we were given some reasons to be optimistic this morning – albeit mildly – following reports that a member of EU negotiator Michel Barnier’s team claimed a divorce deal is very close. Traders have become very sensitive to reported comments on the progress of negotiations and while this morning’s response was a little smaller than what we’ve seen previously, it was enough to drive the pound significantly above 1.30 against the dollar and hold there, for now.

With time fast running out, the optimist – and, I hope, realist – in me thinks we should start to hear some positive news on a compromise quite soon as a no deal Brexit is in no one’s best interest, even if the UK would be much worse off in that scenario. How that agreement will look and whether we should prepare for other obstacles once such a deal reaches the parliament stage is another thing. For now, the pound is responding very positively to good Brexit news and unless talks take a dramatic turn for the worse, it may be well supported as we near the eleventh hour deal negotiators love to embrace.

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