Weekly Game Plan 5 Nov 185th November 2018
The main preoccupation this week is the US Mid-Term Elections. Amongst market participants there is nervousness that a Democratic victory in the House will undermine the current US recovery. There seems to be an extreme partisanship brewing in both the ranks of the Republicans and Democrats, which means neither party will easily accept the outcome, and this could lead to further civil unrest. The probability of a political gridlock seems to be highest as neither side can easily win a strong majority.
Over the weekend, we initially saw a report suggesting an all-UK customs deal will be written into the legally binding agreement governing Britain’s withdrawal from the EU to avoid the need for an Irish backstop. However, shortly after this was defined as “speculation” by Prime Minister Theresa May’s office. More confusion and more doubts regarding Brexit…will we get a deal around the end of November as Raab had suggested?
Themes for the Week:
- US Mid-Terms: markets will likely remain dormant ahead of the elections. Long story short, a Republican majority in both Houses will likely result in a knee-jerk reaction to buy equities in anticipation of more tax cuts and bank deregulation; vice-versa, a Democrat majority in both Houses will likely result in a knee-jerk reaction to sell equities, as political gridlock will prevent the rolling out of market friendly policies and there would be a higher probability of deeper probes into the dealings of the Trump admistration.
- US-China trade war: the market is still reacting to this theme in hope of a breakthrough when US President Trump meets China President Xi later this month at the G20 meeting in Argentina.
- EU-UK deal or no-deal? GBP will remain extremely sensitive to this theme.
- FOMC rates decision: no one is expecting the Fed to move at this meeting and the statement will likely remain the same. There won’t be a press conference by Fed Chair Powel. Nor will there be a release of the “dot-plots”.
- The RBA and RBNZ also meet and neither central bank is expected to move rates, nor are they expected to signal a change in policy anytime soon.
Data in the Week Ahead:
- NZD employment and Inflation Expectations
- UK GDP
- China Trade data and CPI.
On the Radar:
It’s tough to make a watchlist ahead of key events. So things may change but I do see weakness in the Euro vs. GBP, NZD, AUD. Jpy pairs also want to rally but they will be even more impacted by the Mid-Terms. The best bet will be to remain flat and re-assess after the elections.
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