September Outlook: Four key event risks mount for financial markets
Germany’s election, highly charged FOMC and ECB meetings, the US debt ceiling and continued political turmoil in Washington could roil markets this month. The end of the illiquidity associated with the summer months could also cause a re-assessment of positions, which may trigger a surge in volatility. Below we consider they key event risks coming up for September:
ECB meeting, 7th September
After the minutes from the July ECB meeting included a comment about the risks of the euro overshooting, expectations have decreased for any policy action at this meeting. The ECB has tied future policy action with the currency, so unless we see a meaningful retracement of recent euro strength then it is hard to see the ECB announcing an end to its Asset Purchase Programme (APP) any time soon. Of course, now that a broad-based economic recovery has taken hold in the currency bloc, even Italy is doing well, the pressure is on for the ECB to end its QE programme, however it may choose to do this down the line when the euro is not in such demand.
Market impact: we could see the euro rally if the ECB continues to reiterate that it doesn’t want a strong currency, yet it is unwilling to alter monetary policy to weaken the single currency directly. Trade on all of the big market moving events in September, login now to start trading. If you don’t have a live account, click here to create one.
Watchlist suggestions: EUR/GBP, EUR/USD, EUR crosses, Dax and Eurostoxx, Eurozone banks.
FOMC meeting, 20th September
There is virtually no chance of rate hike from the Federal Reserve at this meeting, with the market only pricing in a 1.4% chance of a hike. However, the market wants to know if there will be a hike in December, which the market is currently pricing as fairly even with a 46.2% chance of a hike in the final meeting of the year. If we get another month of weak inflation data, the next CPI report is released on 14th September, then we could see the Fed shift back to a dovish message at this meeting, putting further rate hikes on the backburner. The focus will also be on what the Fed plans to do with its balance sheet reduction programme. It may announce the date it will start balance sheet reduction and stop reinvesting proceeds from assets currently sitting on the Fed’s balance sheet, however, it is likely to be at such a slow pace we expect the market impact to be minimal.
Market impact: the biggest risk is for a dovish Fed to weigh on the dollar, this could also boost US indices, but would be bad news for US banks. Trade on all of the big market moving events in September, login now to start trading. If you don’t have a live account, click here to create one.
Watchlist suggestions: USD/GBP, USD crosses, Wall Street, US Equities, US banks.
German election, 24th September
The latest opinion polls suggest that Chancellor Angela Merkel’s Christian Democratic Union Party (CDU), along with its sister party the Christian Socialist Union (CSU) will win a majority at next month’s German election; however they are likely to fall short of a formal majority. This is common in Germany, and Merkel’s CDU should be able to form a government with the help of some of the small parties. The polls are also suggesting that German’s are very happy with their current government, and it is increasingly looking like this is Merkel’s election to lose. The only risk is that Martin Shultz, her nearest rival for Chancellor, wins the most seats along with his Social Democratic Party (SPD). The latest polls do not suggest that this will be the case, with Merkel’s CDU expected to win 40 seats and Schulz’s SPD expected to win 25 seats. We believe that a win for Merkel will not have a major market impact, as it is what the market is expecting, although once the result is confirmed it could give the Dax a small boost, as markets tend to favour political continuity. Obviously, a surprise win for Schulz would be the low probability but high risk event. He is very pro-EU, but is not fond of the British or Brexit, so a surprise outcome for the German election may actually trigger weakness in the pound as it could be harder for the UK to secure a decent Brexit deal with the EU by the 2019 deadline.
Market impact: As mentioned, if Angela Merkel wins then we don’t expect a large reaction to this election as it would be politics as usual for Europe’s biggest economy. While a win for Schulz would be bad for the pound, the other German party to watch is the Alternative for Germany (AfD). It is the anti-EU and anti-immigration party and if it does better than expected, currently it is expected to win only 8 seats, then it may cause some jitters in European markets. While either Merkel or Schulz are highly unlikely to enter into a coalition with the AfD, so they are unlikely to get into power, a stronger showing in these elections could give the AfD a platform to spread their anti-EU message and rattle the euro and European indices in the months to come. Trade on all of the big market moving events in September, login now to start trading. If you don’t have a live account, click here to create one.
Watchlist suggestions: DAX, EUR Crosses, European Indices, German Equities eg: Allianz, Bayer, BMW, Deutsche Bank, E.ON, SAP, and Volkswagen.
US debt ceiling, 29th September
US lawmakers return to Capitol Hill on 5th September and have 12 working days to pass legislation to raise the debt ceiling, otherwise there could be a US government shutdown, and, in the extreme, a US debt default. The debt ceiling, currently at $19.8 trillion, needs to be raised by 29th September, although the Congressional Budget Office believes money can be found to last through to October 11th, either way we are close to that ceiling. The Senate needs 60 votes to pass a bill to raise the debt ceiling, and a bipartisan deal is required. Since Republicans control Congress this should be easy to pass, right? Well, no, there are some fiscal hawks on the Republican side who may not support the bill to raise the ceiling unless Democrats agree to large cuts in public spending, which may not be popular. We have been here before, in 1995 and 2011 there were government shut downs. In 1995 Treasury yields fell sharply but stocks were ok, in 2011, the year the US lost its top credit rating by the S&P, stocks fell sharply and US growth slowed in the immediate aftermath. At no time has a debt ceiling wrangle in Congress caused the US to default on its debt. We don’t think it will do so this time. Usually, debt ceiling problems don’t last for a long time, law makers tend to react quickly when financial markets turn against them. However, uncertainty over the debt ceiling could keep the Federal Reserve on the cautious side when it meets in September, which could limit dollar strength.
Market impact: a bias for a weaker dollar and stocks are also likely to be jittery. If we see North Korea tensions flare once up at the same time as the debt ceiling negotiations then this could be a bad month for risk assets. Trade on all of the big market moving events in September, login now to start trading. If you don’t have a live account, click here to create one.
Watchlist suggestions: USD, US/Asian Indices, US Equities, Swiss franc, Gold, Gold mining stocks, US defence stocks including utilities and healthcare.