It’s payrolls, politics and power prices that dominate the developed markets agenda for the week ahead. Markets have kicked off the week on the back foot after Friday’s rally, while the dollar remains stable. New worries about Evergrande, uncertainty about US infrastructure, and covid headlines are in the limelight as the week begins.
US payrolls set to green-light a November tapering announcement
At his testimony to Congress earlier in the week, Federal Reserve Chair Jerome Powell said conditions “have all but met” the test for QE tapering with this coming week’s jobs report set to confirm it. Payrolls growth averaged 876,000 per month through May-July, but the resurgence of Covid contributed to a significant slowdown in August to “just” 235,000. However, with Covid cases falling away sharply, we expect September to have seen a re-acceleration to the 450-500,000 range. Jobs growth is set to improve further in the coming months, given high-frequency data points to a decent uptick in economic activity – such as in restaurant dining, travel and hotel stays.
A tapering announcement at the November 3rd FOMC meeting is our base case, which will likely see monthly purchases of Treasury and agency back MBS securities reduced by $15bn each and every month from December onwards. Comments from officials suggest this will be a straight line process over eight months, but we wouldn’t be surprised to see it concluded more swiftly.
US Congress: Voting on the bipartisan infrastructure bill was suspended amid a lack of support from the left-wing of the Democratic Party. Progressives want guarantees that the larger $3.5 trillion bills would receive backing from centrists. Uncertainty is weighing on sentiment.
Nonfarm Payrolls stand out as the main event of the week and could seal the deal on the Federal Reserve’s expected tapering announcement. Fed Chair Jerome Powell’s signal of such a reduction in bond-buys is the main reason for the dollar’s rally early last week. Fed officials James Bullard and Kenneth Montgomery are set to speak later in the day.
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Mad Money’s Jim Cramer expects profit-taking will weigh on shares as quarterly earnings—which could reflect some of the worst days of the pandemic—are released. Other analysts point to the October Effect, an accepted perception that equity markets generally decline during the month, on added volatility, even as the fourth quarter, which starts in October, often provides positive returns overall.
Yet other strategists are forecasting rising equities, perhaps even fresh records, despite the Fed beginning to withdraw stimulus and the pandemic continuing to constrain global supply chains, an additional inflation trigger.
According to CFRA Research, since WWII, the S&P 500 Index, gained 3.9% on average during the fourth quarter and was positive 80% of the time. That would make Q4 the best quarter of the year during the period studied.
However, even if the broad benchmark matched or exceeded those statistics, to reap those gains in 2021 investors would still have to weather the historically tumultuous month of October, which saw 36% higher volatility when compared to other months of the year.
Evergrande: The Chinese construction behemoth is in the spotlight again after trading was suspended in shares. The fate of a $260 million debt payment is in the air, yet reports of sales of some of its assets and an orderly restructuring provide hope. Chinese markets are closed for a holiday and resume activity only on Friday.
Concerns that global growth would be delayed due to inflation and supply-chain issues continue weighing on sentiment.
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OPEC+ members are meeting to discuss oil output cuts amid higher fuel prices, especially those of natural gas. No substantial changes are expected. WTI Crude Oil is trading around $75, close to the highs.
Cryptocurrencies: Bitcoin is holding onto gains recorded on Friday when it shot from $44,000 to $48,000. Speculation about regulation is in play. Ethereum is changing hands near $3,330, above last week’s levels, and Ada is around $2.20.
On a Crypto front we do like the look of price action as well as the reaction to many hurdles put in its way. We see immediate resistance around $51000 however, we believe a bull run could be around the corner. With a long term price target at $83000 which might seem extreme. However we stand by this as long as the $40000 bottom on price continues to hold. As demand grows and weighs on supplies we expect Bitcoin to rise dragging the entire Crypto market along with it.