By Hussein Sayed, Chief Market Strategist at FXTM
Investors are having a difficult time assessing the current economic and financial environment, hence making it hard to manage their portfolios. While risk appetite was supported by central bank easing, particularly from the European Central Bank and the Federal Reserve, two major factors that remained unresolved are trade disputes and rising tensions in the Middle East.
Despite the statement from the Chinese Ministry of Commerce describing talks held last week with its US counterpart as “constructive,” the withdrawal from a planned visit to US farm states reignited traders’ concerns. As a result, all three US major indices ended Friday’s session in the red with the tech-heavy Nasdaq Composite leading the declines with a 0.8% drop.
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Investors remain unconvinced that a trade deal is about to see the light of day soon, and that’s likely to put a cap on any further gains in risk assets. The longer it takes to strike a deal, the more economic damage will be felt. This would likely lead to more rotation into value stocks rather than momentum or growth ones.
There’re plenty of economic data releases this week that will help investors evaluate the current fundamentals. In Europe, flash PMIs from Germany and France are expected to point to a slight recovery in manufacturing activity during September. This year has shown a significant divergence between the manufacturing and services sectors, with manufacturing activity falling to multi-year lows, while services are managing to hold up. Whether the ECB’s latest monetary easing has helped improve this data will be seen later on Monday.
In the US, the final Q2 GDP will be released on Thursday, but analysts expect it to be a non-event. Instead, investors should be interested in US Consumer Confidence data on Tuesday.
Consumers have been shrugging off the latest escalation in the trade war and as of the latest release in August, they didn’t seem worried about rising prices. However, if consumer confidence shows signs of weakness, it will be an early signal that their spending, which accounts for roughly 70% of GDP, will slow down in Q4.
Sterling traders will mostly be interested in the ruling of the UK’s Supreme Court on whether Prime Minister Boris Johnson acted lawfully in suspending Parliament. A ruling against the government will force him to recall lawmakers, which will be considered good for Sterling as it increases further the chances of delaying Brexit.
Monday’s biggest moves were seen in Oil prices with Brent and WTI both rising more than 1%.
Two questions need to be answered this week to help forecast the next move. How fast will Aramco restore lost output and what are the chances of a US strike against Iran? While investors do not seem to be pricing in a military confrontation, this option shouldn’t be completely ruled out.
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