- Markets are in a holding pattern as investors weigh risks and uncertainties ahead of a busy week filled with key events.
- The US election is drawing closer, and markets may react to the possibility of a Trump victory, which could lead to a rise in the US Dollar and inflation expectations.
- The Bank of Japan (BoJ) meeting is a highlight in Asia, with market expectations leaning towards no rate hike.
- In the UK, the first budget by the Labor Party under Chancellor Rachel Reeves is highly anticipated.
Week in Review: Markets Appear to Be in Holding Pattern as Uncertainties Pile Up
A mixed week comes to a close as markets appear to be balancing their risks ahead of a blockbuster week. Wall Street Indexes suffered early in the week before the Nasdaq and S&P 500 rallied late Thursday and into Friday on the back of a rise in Tesla (NASDAQ:TSLA) stock. A good start with the rest of the ‘magnificent 7’ due to report next week.
The IMF conference in Washington will continue into the weekend with no significant developments coming thus far. A few speeches by Central Bank policymakers also throwing up nothing of note has left markets in a state of wait and see as risk and uncertainty begin to pile up.
Market attention will start to turn toward the US election which draws closer. If markets begin to price in a Trump victory the US Dollar could continue to rise. Markets may see a potential rise in inflation and thus less rate cuts should Trump emerge victorious.
There appears to be mixed polling thus far with betting markets pricing in a sizable Donald Trump lead, while a recent Reuters/IPSOS Poll saw a 3% lead in favor of Kamala Harris. The uncertainty is keeping markets on edge and could result in some wild swings as the election draws closer.
The UK saw some weakening PMI data and cooling price pressures this week which adds to the possibility of a BoE rate cut on November 7. However, the week ahead will focus on the first budget by the Labor Party and Chancellor Rachel Reeves. There have been mixed comments with the new Chancellor stating only yesterday that ‘debt will be redefined in the upcoming budget as a % of GDP’. There are also questions around tax hikes etc which makes this a key event for the UK economy.
British government bond yields rose sharply with the GB10YT=RR on Thursday after Finance Minister Rachel Reeves said she would change the fiscal rules to allow her to borrow more to invest. This has left the risk premium on British bonds at a one-year high.
Source: LSEG
Tokyo inflation data released on Friday have complicated matters for the BoJ, just as market optimism had been growing for further rate hikes. Tokyo Core CPI, a leading indicator of inflation trends in Japan, fell to 1.8% y/y in October, down from 2% in September and just above the market estimate of 1.7%.
Commodity markets continue to rise with Gold and Silver in particular continuing their stellar performance. Gold continues to find support as global uncertainties continue to rise.
Oil prices look set for modest gains despite a turbulent week that saw some swings in price. The uncertainty in the Middle East continues to keep oil supported.
As long Middle East tensions remain in play, Oil prices will remain supported. The risk premium may continue to flow back and forth which will affect both Oil and Gold moving forward.
The Week Ahead: Magnificent 7 Earnings, NFP Data, UK Budget
The week ahead kickstarts a two week frenzy of risk events and market uncertainties which could result in wild price swings and an upsurge in volatility. Highly awaited earnings from the ‘magnificent 7’ await with indices likely to see a surge in volatility. The S&P 500 and Nasdaq 100 are both within striking distance of their respective all-time highs.
US Jobs data could see rate cut expectations repriced once more and this could have a knock on effect on the US Dollar, US Yields and wall street indexes.
Asia Pacific Markets
In Asia, the Bank of Japan (BoJ) meeting is the highlight of the week. I think the Tokyo data this week has provided a reality check for market participants who had gotten ahead of themselves hoping for a rate hike next week.
I am of the belief that we will not get a rate hike next week but rather expect the BoJ to repeat that if the economy grows as they expect, they will keep adjusting monetary policy back to normal.
According to LSEG data, markets are pricing in an 84% probability that the Central Bank will keep rates on hold.
Source: LSEG Workspace
Everyone will be watching the BoJ quarterly report closely. There is a possibility that inflation for 2024 might be predicted to go higher, but no big changes are expected for next year. However, the GDP forecast for the fiscal year 2024 might be lowered because of recent drops in production in the car industry and natural disasters.
In Australia, inflation is getting closer to the target. Year-on-year inflation is expected to drop in the third quarter, reaching the 2-3% target range for the first time since mid-2021, mainly due to lower gasoline and electricity rebates. However, core inflation is likely to stay above 3% because of the tight job market, meaning the Reserve Bank of Australia probably won’t cut rates in their November meeting.
Europe + UK + US
In developed markets, the Eurozone will get the Q3 preliminary GDP numbers which may provide a better picture into the health of the economy. The question for the Euro Area appears to be one of growth now rather than a focus on inflation, much like how the US focus has shifted to the job market. A poor GDP print might increase the rate cut probabilities for the ECB and this could weigh on the Euro.
The US has a pretty busy week with earnings expected from megacap technology firms including Alphabet (NASDAQ:GOOGL), Apple (NASDAQ:AAPL) and Microsoft (NASDAQ:MSFT) are also due, along with the nonfarm payrolls report for October.
Different earnings results in various sectors and ongoing uncertainty about the U.S. election have made investors careful. However, it would appear markets have begun to consider the possibility of Donald Trump being re-elected recently as reflected in betting data. According to historical data, US stock markets perform better under a unified government as you can see from the chart below. 
Source: LSEG, Evercore
In the UK markets wait with bated breath for the first budget of the Labor Government to be presented by Chancellor Rachel Reeves on Thursdays November 30. Chancellor Reeves will likely need to spend more on government departments each day, which means taxes might go up, especially for employers.
While there will be more investment, it will probably be small because the Treasury wants to avoid borrowing too much and worrying the markets. All in all it is expected to be challenging for Reeves hence why this budget will be intriguing.
Chart of the Week
This week’s focus is on the GBP/USD which i have been monitoring for a while. There is a the possibility of a breakout in either direction and given the host of data affecting the US Dollar and the GBP, I think they could be the catalyst to facilitate a move.
Cable bounced out off a key confluence zone by recording its third touch of the ascending trendline before recording a bullish engulfing daily candle close. This saw a bounce on Friday but the pair continues to struggle to gain acceptance above the 1.3000 psychological level.
There is the possibility of a break below the trendline and retest of the 200-day MA resting lower at the 1.2800 handle. As much as the confluences support a narrative i would caution against being too biased on any setup next week. Given the fundamental risk at play, we could see wild price swings which could influence potential setups.
GBP/USD Daily Chart – October 25, 2024
Source:TradingView.Com
Key Levels to Consider:
Support
- 1.2940
- 1.2800
- 1.2750
Resistance
- 1.3000
- 1.3100
- 1.3250
Read More: GBP/USD Technical: Bounce off Key Confluence Level Post PMI, Further Gains in Store?