Mixed start to the week ahead of Fed meeting

We’re seeing mixed trade across Asian markets at the start of the week and while Europe is eyeing a slightly positive start, gains may be limited by the events to come later in the week.

The most obvious of these is of course the Fed meeting on Wednesday. Expectations may still be low when it comes to a rate cut but that by no means is a given. The timing of the meeting, coming just before Trump and Xi’s meeting at the G20, is clearly a good reason to hold off with the outcome of that potentially strongly influencing the path to come. That said, the central bank has favoured these quarterly meetings in the past for monetary policy changes as they’re accompanied by new economic projections which can justify the moves. Either way, this weeks meeting will be interesting.

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Even in the absence of a rate cut, the Fed will release new economic projections and the dot plot of interest rate expectations at a time of considerable uncertainty. If the markets are correct and they’re planning to cut in July – currently 82% priced in vs only 18% this week – we should expect a clear signal of such this week, one which policy makers may be forced to act on regardless of the outcome of next weeks talks at the G20 in Japan. The outcome of the meeting this week though is far from certain, which may feed into the feeling of wariness at the start of the week.

UK leadership race heats up

The number of MPs vying for Conservative leaders – and therefore UK Prime Minister – has already shrunk considerably ahead of last night’s debate, although there is one more than it appeared after Boris Johnson decided, as frontrunner, it wasn’t in his best interest to show up and be targeted by so many colleagues at the same time. That pleasure will be saved for the second debate on Tuesday, after the second ballot has whittled down the numbers a little further when Johnson will no doubt feel a little safer from being ganged up on.

The leadership race is not the only point of focus in the UK this week – although as far as the markets are concerned it’s by far the most important and will likely have the greatest impact. The Bank of England meets and announces its latest decision on Thursday. You can be forgiven for not getting too excited about this in the current climate and with there being considerable uncertainty over Brexit. Even markets don’t much any time soon – 75% chance of no change between now and August next year – so we probably shouldn’t expect too much from Thursday. Retail sales and inflation data will also keep things interesting this week.

Oil higher but traders remain calm

It’s quite clear that last week’s events in the Gulf of Oman have heightened geopolitical tensions at a time when the US is trying to crush the Iranian economy and force change to the nuclear deal negotiated by Trump’s predecessor. The suggestion that the attack on the two tankers was a case of Iran lashing out and reminding the US that it can respond strongly and effectively to the sanctions has not fallen on deaf ears but traders aren’t panicking just yet.

The spike on Thursday was quickly pared and the highs haven’t been topped just yet, even if prices have remained slightly elevated. Oil also failed to reach the highs of a week ago which suggests this market remains under pressure despite the now increased levels of geopolitical risk. Traders will continue to monitor the situation closely given the important of the Strait of Hormuz to global oil markets but clearly don’t view current events as being evidence that the situation is going to significantly escalate.

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