Week Ahead: October 10th 2018

04/10/2018

The trading week may have been determined by the US Non Farm Payrolls last week and the sharp rise in US Treasury yields, but some key fundamental events are taking place this week which may also trigger volatility in financial markets. 

We are looking at three key events for financial markets this week. 

Chinese trade data: trade wars on the horizon?

First up is a plethora of Chinese data for September. This includes the service sector PMI, and most importantly trade data due on Friday. The market will be watching closely to see if China’s export volumes have been hit by US trade tariffs on Chinese goods. If we see a sharp drop in exports then it will be worth watching the Chinese authority’s reaction. Will they slap retaliatory tariffs on more US goods? Could this lead to a further escalation in the US/China trade war?  If it does then it could hurt risk sentiment and knock global stock markets.

You may recall that US stocks made record highs last week, however, rising Treasury yields in the US, the 10-year yield surpassed the crucial 3% mark last week, has knocked them off course. An escalation in trade war fears could also add to the pressures on the downside, and October may prove to be a tricky month for US stock markets. 

What UK production data can tell us about the Brexit effect

Next, we will be looking at the UK’s industrial and manufacturing production, scheduled for release on Wednesday 10th October. Now that the Conservative party conference is out of the way, political risk for the pound should ease off until 18th October when we get the next EU Brexit summit. Until then we will need to analyse the economic data to get a steer on where the pound may go next. After falling sharply during the first half of last week, GBP/USD managed to climb back above $1.30, the question now is, can it extend these gains?


Production data for the UK will be watched closely to see if Brexit uncertainty is hitting production and having a real impact on the economy. We know a lot of firms are concerned about Brexit and the impact of potential customs barriers with the EU, for example multiple car producers have threatened to quite the UK if it crashes out of the EU without a trade deal. If the fear of a no-deal Brexit is already leading companies to scale back production then we would expect the pound to fall sharply, with a return to sub $1.30 vs. The USD. The pound may also fall against the euro and some safe havens like the yen and Swiss franc. 

ECB: what does it make of Italy’s budget, and will it step in to cushion Europe’s weakest banks?

Lastly, we will be watching the ECB meeting, scheduled for Thursday October 11th. The market will be watching to see if the ECB has anything to say about Italy’s Budget, the sharp rise in Italian bond yields and the flaunting of EU budgetary rules by Rome. Also, will the ECB mention anything about Italian and Greek banks, which came under heavy selling pressure last week. If the ECB sounds concerned about the currency bloc’s weakest banks, but reiterates that the ECB won’t bail them out, then we could see further selling of European equity indices, which are heavily exposed to the financial sector.


Regarding monetary policy, the recent disappointing tone to European economic data combined with the political and bank fears, leads us to believe that the ECB will hold steady and not say anything about following the Fed and tightening policy in the coming months. Overall, we think that the bias is to the downside for the euro on the back of this meeting, especially since the dollar continues to rally strongly.