Week ahead US midterms three central banks and more earnings

As another volatile week is about to conclude, equity markets were coming under a bit of pressure and were giving back a big chunk of their gains from earlier in the week. In large part, this was due to a sharp sell-off in Apple shares following the tech giant’s poorly-received earnings update on Thursday evening. In addition, US 10-year debt yields were on the rise again, boosted by a strong rise in US employment and wages, which increased the prospects of a December rate hike, thus eroding the attractiveness of the higher-yielding stock markets slightly. Meanwhile the NFP also underpinned the dollar, which had actually come under some pressure in mid-week after several foreign currencies simultaneously found support. In commodities, safe haven flows kept gold support, while crude oil further extended its decline on excessive supply concerns. The OPEC has already ramped up its production by a good 1 million barrels per day over the past three months, presumably to offset the reduction from Iran due to the US sanctions coming into force next week. What’s more, Russia’s oil production of 11.41 million barrels per day in October was a record high. Meanwhile the supply of oil is growing in the US more robustly than expected.

Hopes over Brexit breakthrough boost pound

Among the foreign currencies finding strong support this week was the British pound, which jumped on Wednesday and pushed further higher on Thursday on comments from Brexit secretary Dominic Raab, who told parliament that the UK could conclude a withdrawal agreement with the EU by November 21. Raab stated that he “would be happy to give evidence to the Committee when a deal is finalized, and currently expect 21 November to be suitable.”

US and China about to resolve their trade dispute?

In addition, we saw big rallies in the likes of the Aussie, kiwi and yuan on Thursday. This was due to two main reasons. First, the People's Bank of China decided to set the USD/CNY rate lower in an attempt to boost its currency. Part of the reason for this was to stem capital outflows from China, but also to provide a good reason for the Trump administration to ease the pressure on China, which brings me nicely to point number 2: Trump tweeted earlier on Thursday that he had a "very good conversation with President Xi Jinping of China... with a heavy emphasis on Trade. Those discussions are moving along nicely with meetings being scheduled at the G-20 in Argentina." Then there was additional news that President Trump had asked his cabinet to draw up a possible trade deal with China.

Look ahead: next week’s main event is US midterm elections

We are now just a month away from the G20 meetings in Buenos Aires, and expectations are rising that a trade deal might be achieved between the world’s two largest economies. Should there be any further progress in this regard then risk assets could find some much-needed support in the week ahead.

But as far as the next week is concerned, we will have three major central bank meetings, US mid-term elections and a few important data releases, and more corporate earnings to look forward to. The volatility from October has so far carried into this month, although it has been the FX markets that have enjoyed the wild swings. As mentioned, the pound, euro, yuan and commodity currencies have all rebounded on renewed hopes over a Brexit breakthrough and a potential trade deal between China and the US at the upcoming G-20 summit in Buenos Aires.

Three major central bank policy decisions, but no rate change expected

In terms of the upcoming central bank meetings, the Reserve Bank of Australia will make its policy decision on Tuesday, followed a day later by the Reserve Bank of New Zealand on Wednesday evening (or Thursday morning NZ time) and then the US Federal Reserve will take centre stage on Thursday. However, none of these central banks are expected to alter their monetary policies, although there could be surprises in their respective policy statements.

RBA could turn more dovish given Chinese stock market sell-off

At its last meeting, on October 2, the RBA was as neutral as one could have expected. Since that meeting, financial conditions have worsened with China leading the global stock markets lower, although they have recovered noticeably in the past week or so. Though there’s been some progress in trade talks between China and the US, with Trump reportedly asking his cabinet to draw up a possible trade deal with China this week, there’s still the possibility that talks could break down again. Developments in China is very important for Australia given their close trading ties. The RBA may mentioned the prospects of a truce in the trade war but it would probably want to see actual action first. Indeed, there’s little reason to turn hawkish given that incoming domestic economic in Australia have been far from rosy over the past month.

RBNZ unlikely to turn hawkish despite CPI surprise

The RBNZ, meanwhile, has not altered its policy since the last rate cut in November 2016. At its last meeting, on September 26, the RBNZ was likewise very neutral, starting that the OCR expected to remain at its current level “through 2019 and into 2020”. Since then, the only major piece of economic data from NZ has been the quarterly CPI report, which actually printed 0.9% for Q3, up from 0.4% in Q2. But, we are not sure if there will be any major changes in the RBNZ’s policy statement.

Will Fed respond to Trump’s criticism?

As far as the Federal Reserve is concerned, well it has come under significant criticism from President Trump for being the lone hawk among the dovish central banks almost everywhere else, bar Canada. So, let’s if the FOMC will decide to change its hawkish tone slightly, especially in the light of the sharp sell-off in the stock markets last month. However, economic data in the US been generally strong, including GDP last Friday, the PCE Price Index – the Fed’s favourite measure of inflation – on Monday, and nonfarm payrolls today. Although the manufacturing PMI was disappointing in mid-week, this could be a one off as clearly the two hurricanes are likely to have been a reason for the slowdown.

Quieter week for economic data

Apart from the above central bank policy ‘decisions,’ next week’s key economic pointers include UK and US services PMIs (Monday); New Zealand’s quarterly employment (Tuesday) and inflation expectations (Wednesday), and UK GDP (Friday).

European corporate earnings in focus

Meanwhile the corporate reporting season continues, although there won’t be many majorly important US names to loofward to next week. But there will be plenty of big-name European companies that will publish their results. Among them:

• Tuesday: Imperial Brands, Randgold Resources, Associated British Foods, WM Morrison Supermarkets, Deutsche Post
• Wednesday: Adidas AG, Munich Re, BMW, ITV, Marks and Spencer Group
• Thursday: AstraZeneca, Burberry Group PLC, J Sainsbury PLC, Deutsche Telekom AG, Societe Generale, Siemens, Allianz

Main event: US mid-term elections

But the main event will be the US midterm elections, which will take place on Tuesday. It is the middle of Republican President Donald Trump's first term, so the outcome of the vote should be very important to say the least. All 435 seats in the House of Representatives and 35 of the 100 seats in the Senate will be contested. My US colleagues Matt Weller has already written a special report on the midterms and what the outcome of the vote may mean for the markets, HERE.

Finally

Please remember that North America will exit the Day Light Saving and clocks are moved back by 1 hour on Sunday. This means that London will be back to 5 hours behind New York from next week, after European countries ended DST last week.