Financial markets are bracing for huge week filled with central bank decisions, the UK general election and a critical deadline with the US-China trade war. Volatility is picking up as the VIX climbed 5.3% in early trade to 14.34. Chinese trade came in worst than expected, a reminder that the trade war will continue to be the ultimate driver for global risk appetite as the world’s second largest economy continues to struggle. Despite one of the biggest Hong Kong pro-biggest democracy protests over the weekend, it is mostly a quiet to start to Monday as the dollar remains mixed and as Treasuries and most government bonds rise.
No major surprises are expected to come from both the ECB and Fed policy meetings on Wednesday and Thursday, respectively. Markets are eagerly awaiting Christine Lagarde’s first policy decision as the new president and will likely continue to emphasis her call for fiscal stimulus from the euro-area governments. The data-dependant Fed should have an easy meeting as they stick to their policy is on hold mantra following Friday’s blockbuster jobs report.
It is all about the election and the latest polls are still showing the Conservatives are on their way to getting a strong majority. The possibility for a surprise remains, but so far it seems Boris Johnson will have the best opportunity into trying get his Brexit deal done.
Oil prices are paring last week’s OPEC + alliance meeting, as dismal Chinese trade data reminded energy traders the world’s second largest economy is getting hit harder than many expected from the never-ending US-China trading war. For oil to break out higher, we will need to see a major breakthrough in the US-China trade war. A simple punt of the December 15th tariff threat will not be enough to encourage the oil demand side of the equation. If President Trump wants a Santa rally, he will need bring down the current tariffs that are in place. OPEC had the best possible outcome last week, but now it seems the markets will remain focused on the demand side. Oil prices could struggle here and remain sensitive to incremental trade updates.
Investors could see steady demand for gold this week as investors remain nervous that we could have a couple worst case scenarios emerge from this week’s UK election, the Hong Kong protests, and critical trade tariff threat deadline. The base case remains optimistic as Boris Johnson is widely expected to win a majority and Trump administration is not expected to deliver tariffs that will mainly punish the US consumer. The reason gold should be supported is that after this week’s events, uncertainty will still remain for months on Brexit and all the trade wars the Trump administration are trying to navigate through.
No bad news is good news for Bitcoin. Bitcoin is still trying to show signs of stabilizing here. With the markets focused on plethora of risk events this week, we could see the largest cryptocurrency in the world continue to grind higher.