The next hint of market direction may come from somewhere unexpected
Last week the headlines were about continued economic strength on re-openings in richer countries and increasing coronavirus cases in poorer countries. Geo-political tensions also resurfaced. Russia and the US go tit-for-tat over a buildup of Russian forces near Ukraine and interference in the recent US Presidential elections. Tensions are also rising with China once again, this time with regards to Taiwan. When will these actions hit the markets? Also, the ECB and the BOC hold Interest Rate decision meetings this week. While expectations are low for a change in policy, forecasts and statements will be watched for any signs of when taperings may begin, particularly in Canada. Also, the first of the FAANGs report this week, with Netflix kicking things off. We’ll also get UK employment data and our first look at global PMI data for April!
Coronavirus and vaccines
Johnson and Johnson paused use of their vaccines due to possible blood clotting, like AstraZeneca. However, they only expect the pause to last for several day as benefits outweigh risks of using the vaccine. But that won’t matter in countries such as India, where new daily coronavirus cases continue to escalate, and vaccines primarily have been exported. India must now pivot and use the inoculations domestically to prevent increases. Major cities, such as New Delhi, have already ordered lockdowns and the Bank of India recently introduced a QE program to help stimulate economy of the country. It will be important for traders to monitor the rise in cases in emerging markets to see if new variants are found and vaccines can be made accessible.
US vs China….and now Russia!
Russia has been building up forces once again at the Ukraine border. This time the increase in military presence is because Ukraine has indicated they would like to join NATO. As a result, the US sent 2 warships to the Black Sea. However, when Russia countered with their own military to the Black Sea, the US backed down. In addition, the US accused Russia of interfering in the 2020 Presidential elections. As a result, the Joe Biden sanctioned 6 Russian companies that support Russia’s cyber warfare, as well as expelled 10 Russian intelligence officers. Russia countered by expelling 10 US diplomats.
Russia isn’t the only country the US is having tensions with. When President Trump was in office, tensions were about trade wars and technology theft. However, Biden has more pressing issues he wants to deal with All countries in the G-7, except for Japan, have applied sanctions to China over human rights issues. In addition, the US is ramping up support for Taiwan’s effort to remain independent from mainland China, which has been flying warplanes overhead as a show of force. This is in addition to NOT removing the sanctions from the Trump administration regarding Huawei.
Traders are looking for the “tapering” sign from the Fed to sell. However, perhaps the catalyst won’t be from the Fed. A wrong move by China, Russia, or the US could spark a selloff….one which no one is expecting!
ECB and BOC
The ECB and the BOC are both meeting this week to discuss monetary policy. The ECB is expected to leave monetary policy unchanged as Europe continues to fight its way through the recent lockdowns due to the coronavirus. New staff forecasts will not be presented until the June meeting. The vaccine rollout has picked up recently, as most European countries have determined that it is safe to use the AstraZeneca vaccine. As a result, Christine Lagarde and ECB members may decide to step on the brakes a bit and bring bond purchases back to pre-March levels, which is roughly 15 billion Euros per week. Traders will be looking ahead to the June meeting. Think about what it will look like in June in Europe: lockdowns over, re-openings, service sector boom. Well, maybe. Will Europe see the same economic boom as the US? Does it matter? (It doesn’t matter to the Fed). We may see the Euro begin to outperform other currencies as Europe’s economy expands, post-lockdown, and other countries slow down, post-stimulus checks.
The BOC, on the other hand, will be interesting to watch! The Bank of Canada was one of the favorites to begin tapering, as economic data had been strong. However, since their last meeting on March 10th, the coronavirus has reared its ugly head once again and daily cases continue to rise. Parts of the country are back on lockdown and others under new restrictions. The central bank may be on hold this week. However, the BOC will also release staff projections. The strong US recovery and stimulus check spending should help the neighboring country. The projections may be revised higher for both GDP and inflation. In addition, employment data last week was strong, however traders must consider that the data will slow in the upcoming months due to the lockdowns. Traders will be keen on hints of tapering sooner than later.
And their off! After stellar reports by big banks last week, Netflix will be the first of the FAANGs to report earnings. Expectations for EPS are $2.98. The rest of the big hitters come next week. But for now, other companies to watch are BA, IBM, and JNJ. Others to watch this week are as follows: KO, IBM, LMT, PG, NFLX, BA, JNJ, VZ, T, BIIB, BX, INTC, AXP
What a week of strong data we just had. From Australian employment to US retail sales, most of the economic data that traders watch was stronger than expected. Will we see more of the same this week? Important economic data releases include the UK Claimant Count Change, New Zealand Q1 CPI, and Global PMIs. Other important data points to note are as follows:
- Japan: Trade Balance (MAR)
- Japan: Industrial Production Final (FEB)
- Australia: HIA New Home Sales (MAR)
- Australia: RBA Meeting Minutes
- Germany: PPI (MAR)
- UK: Claimant Count Change (MAR)
- New Zealand: Inflation Rate (Q1)
- Australia: Retail Sales Prel (MAR)
- UK: Inflation Data (MAR)
- Germany: 10-Year Bund Auction
- UK: BOE Gov Bailey Speech
- Canada: CPI (MAR)
- Canada: BOC Interest Rate Decision
- US: 20-Year Bond Auction
- Crude Inventories
- EU: ECB Interest Rate Decision
- Canada: New Housing Price Index (MAR)
- EU: Consumer Confidence Flash (APR)
- US: Existing Home Sales (MAR)
- Global Manufacturing PMI Flash (APR)
- Global Services PMI Flash (APR)
- UK: GfK Consumer Confidence (APR)
- Japan: CPI (MAR)
- UK: Retail Sales (MAR)
- US: New Homes Sales (MAR)
Chart of the Week: 240-Minute US 10-year Yields
Source: Tradingview, FOREX.com
After a surprising move higher throughout the month of March, US 10-year yields put in a high on March 30th. That high turned out to be the head of a head-and-shoulders pattern. On Thursday, yields broke the neckline of the pattern and moved lower towards the target, which is the distance from the head to the neckline, added to the breakdown point of the neckline. In this case it is near 1.437. Notice that the bounce off the lows coincided with an oversold RSI, which has now unwound back into neutral territory. Horizontal support ahead of the target is at Thursday’s lows of 1.53 and then the March 11th lows of 1.475. Resistance above is at the neckline near 1.619 and then the top of the right shoulder near 1.701.
While most people are watching earnings, economic data, central banks, and the direction of the coronavirus to provide hints as to the next direction for monetary policy, there is a chance it may come from somewhere unexpected. If push comes to shove between the US and either Russia or China, markets may begin to react to these outside forces.
Have a great weekend and please remember to always wash your hands!