Any ghouls and ghosts planning to haunt the fears and nightmares of adults this Halloween might as well pass up financial market participants. Nothing on Wednesday can match the shrieks and wails that many otherwise calm folks have been experiencing this October.
Octobers are often volatile for stocks. Whether these tremors start in equities or not, there is a well-worn path of how they play out in markets I have already gotten questions as to why the dollar strengthened last week even as we were seeing steep drops in equities. Why would anyone outside the U.S. want to sell their currency and buy dollars to invest in a plunging market?
The answer harks back, at least partially, to the risk-off behavior of U.S. corporations and investors desperate for liquidity in the credit crunch in the fall of 2008. In order to meet dollar liquidity back home, many companies and speculators had invested in riskier assets outside of the U.S. The rapid unwind of those positions boosted the dollar even as the U.S. stock market was falling.
Then there was the unwinding of carry trades pre-2008 where investors desperate for yields had borrowed funds in low interest rate economies and loaned them out in high interest economic environments. A popular one was borrowing in Japanese yen and loaning out those funds in Australian dollars. When the markets hit the skids that fall, everyone headed for the exits at the same time on these trades, meaning that folks had to sell Australian dollars and buy Japanese yen to unwind those trades. The yen has been a “safe haven” currency ever since.
Markets will still be on edge this week as we still have earnings releases and some key central bank meetings. The week will be capped off with non-farm payrolls on Friday. Good luck.
MAJOR CENTRAL BANK ACTIVITY THIS WEEK
Bank of Japan
Expectations for rates to remain unchanged at -0.10%
Bank of England
Expectations for rates to remain unchanged at 0.75%
KEY MARKET MOVING ECONOMIC RELEASES
United States and Canada
Expectations for gains of 187K
Expectations for a deficit increase to -53.6
Initial jobless claims
Expectations for claims to drop to 212K
Expectations for an increase of 12.5K
Expectations for a gain of 193K
EZ Q3 GDP
Expectations for a gain of 0.4%; YoY at 1.5%
Expectations for a gain of 0.6%, YoY at 2.3%
U.K. Markit PMI
Expectations for a drop to 53
Asia/China, Japan, and Australia
China Mfg PMI
Expectations for constant reading at 50
Japan Industrial Prod
Expectations for a slight decline of 0.3%
Expectations for a YoY moderation to 1.9%
The EUR continues to be trapped in an endless rotation of bullish and bearish minicycles interspersed between periods of consolidation going back to May. Potential EC – Italian budget confrontations have provided near term concerns causing euro weakness and remain a volatile component for the markets. The ECB meeting next week could be important; otherwise, expect further consolidation and sideways trading for now.
The GBP too continues to mirror much of the movement of the euro colored strongly by news headlines related to the Brexit negotiations. The market seems to be pricing an eventual deal with the EC but PM May will have to face further hurdles in getting the Tory party and Parliament to sign off on any final Brexit negotiation. Expect further consolidation ahead.
The JPY remains difficult to forecast as the market shifts ground very quickly over a wide variety of variables. One week, rising U.S. interest rates causes JPY weakness followed immediately by U.S. equities collapsing sending the market into risk-off mode causing the JPY to strengthen. Expect more volatile times ahead.
The CAD continues to reflect the most recent news cycles and vacillates back and forth between periods of strength and weakness. Rising oil prices and the USMCA help to boost sentiment, but most recently, the CAD has been weakening due to weak Canadian economic data. The Bank of Canada raised interest rates by 25 bps as expected.
The CNY has stabilized but remains vulnerable to further weakness. U.S. – China trade negotiations are non-existent and tensions remain high as both sides remain extremely dug in. Continue to expect a steady to weaker CNH as this negotiation appears to be more than just a trade dispute but more about geopolitics and China’s place as a rival to the U.S.
The AUD remains weak and continues to be in a downtrend channel since January’s peak near $0.8100. There are ongoing concerns about weaker demand for Aussie commodity exports from a Chinese economy that is starting to feel the impact of tariffs has the market concerned. The Reserve Bank of Australia remains clearly on hold as uncertain times lie ahead. Expect a steady to weaker Aussie in the near term.
Want to learn more about international finance, economics, and global events? Sign up for our other Foreign Exchange emails and videos!
Follow City National Bank on social media:
Investment and Insurance Products:
Are Not insured by the FDIC or any other federal government agency
Are Not deposits of or guaranteed by a Bank or any Bank Affiliate
May Lose Value
This report is for general information and education only and was compiled from data and sources believed to be reliable. City National Bank does not warrant that it is accurate or complete. Opinions expressed and estimates or projections given are those of the authors as of the date of the report with no obligation to update or notify of inaccuracy or change. This report is not a recommendation or an offer or solicitation to buy or sell any financial instrument discussed. It is not specific investment advice. Financial instruments discussed may not be suitable for the reader. Readers must make independent investment decisions based on their own investment objectives and financial situations. Prices and financial instruments discussed are subject to change without notice. Instruments denominated in a foreign currency are subject to exchange rate and other risks. The Bank (and its clients or associated persons) may engage in transactions inconsistent with this report and may buy from or sell to clients or others the financial instruments discussed on a principal basis. Past performance is not an indication of future results. This report may not be reproduced, distributed or further published by any person without the written consent of City National Bank. Please cite source when quoting.
Here's what this indicator is saying about US stocks right now. ACTIVE INVESTOR WEEKLY EDITION: January 21, 2022 View in a browser FIDELITY VIEWPOINTS ® WEEKLY EDITION: January 21, 2022 Bollinger band stock signal Here's what this indicator is saying about US stocks right now. Read more CHART OF THE WEEK Inflation and corporate consolidation US industries have become
Learn how to keep all your accounts—not just the ones at Fidelity—secure. November 18, 2021 View in a browser FIDELITY VIEWPOINTS ® WEEKLY EDITION: November 18, 2021 What to do after a data breach Learn how to keep all your accounts—not just the ones at Fidelity—secure. Read more What's ahead for your RMDs Make sure to take your required withdrawals this year, then start to plan ahead.