Brief wobbles aside, world stocks have sailed through a largely uneventful week on key fronts. Next week is unlikely to be as relaxed.
U.S. inflation plays ball
After lots of hanging around, the outcome of low-tier trade discussions was a ‘yes’ to higher-level talks. Up-to-the-minute Fed guidance from chair Jerome Powell and lieutenants largely reiterated last week's accommodative pivot. Despite a tumultuous week in the UK and U.S. retail sector, there have been no pivotal earnings from global titans. Even one of the centrepiece macroeconomic releases of the week, U.S. inflation data out a little earlier, made no waves with everything printing in-line and unspectacular. Still, crucial support from monetary policy guidance has made the week less of a waiting game and more of a window to buy back risk. The updraft has enabled almost all of the world’s principal indices or regional gauges to shake off 2018’s residual funk, and break into positive territory for the month. As such, January is already almost the mirror image of December. Mixed equity index performance at the close of the week looks largely a function of cautious position closing in lieu of fresh direction.
Normalised equity index chart: daily intervals – 31st December 2018 to date [11/01/2019 16:13:20]
Source: Refinitiv/City Index
U.S. Banks and Netflix
The obvious question is, ‘can stocks keep gaining when conditions become more challenging?’ Next week promises to be quite different. For one thing the reporting season will kick up a gear. Quarterly reports from all five dominant U.S. banks will be crammed in, as will Netflix, Amex and more. The high possibility of at least one major corporate earnings let down presents the biggest risk of an upset to the plain equity market sailing so far.
CPI updates from the UK, Eurozone and Japan and Canada will also shine a further light on how much of a setback December’s oil price gyrations were to inflation. Another gaggle of clutch of central bank speakers will also hit the wires, including an address by the ECB’s Mario Draghi to the European Parliament at which he will probably face more direct barracking about policy. 5 Fed presidents are likely to hone the FOMC’s new message of flexibility even more, keeping the dollar capped.
Then there’s Tuesday’s parliamentary Brexit vote. Sterling has been drifting hither and thither ever since Downing Street canned December’s attempt, but it hasn’t fallen off a cliff. The House of Commons’ successful bid to restrict the hand of Theresa May’s government in the event of no-deal being in place by 29th March has calmed nerves. It’s impossible to gauge how serious any moves towards a delayed departure are. Prospects of a government collapse that may herald an election, and a possible Labour win – problematic for markets – are similarly murky. The key for now though is that probabilities of such are appear objectively higher and Hard Brexit risk has been slashed, lowering the temperature of the sterling market and also in equities to an extent.
Watch sterling vol.
Consequently, sterling option premiums covering the month have sunk from two-year highs seen around mid-December. Short-term GBP/USD implied volatility still projects large swings by the spot, but such risks were deemed the lowest in six months earlier in the week. The vote is still an historical inflection point that market participants must handle with care. The outcome may be predictable, the market outcome less so. Sterling vs. dollar can be expected to retreat to a pivot at $1.266 marked out in August. Depending on the trimmings that come with the government’s likely defeat it could either then revert back towards the centre of the range that is capped by a high of $1.32s of September or signal resumed crisis with a break below. It could all be over in a flash; but the real action will start in the days that follow.
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