Let’s just say, this week is a recipe for some big market moves. The double-edged threat of US government shutdown, mixed with potentially market-moving data from the UK & Australia makes for a heady mix. The S&P 500 opened with a large 1.5% gap, a testament to investor enthusiasm. Or, perhaps more importantly, tomorrow’s UK GDP numbers. Traders are anxiously awaiting news that will have a direct impact on other asset classes, particularly bond and equity markets.
The big US government shutdown – this one has received much attention – appears ready to come to an end if a short-term funding agreement now under discussion is approved. This continuing resolution would keep most federal activities running through the end of January, while allowing some agencies to continue through September by receiving full-year appropriations. Policy recommendations This set of realities will have profound implications for the US economy. Even further, it will affect world markets as investors recalibrate their portfolios.
UK Economic Data: A Turning Point?
The UK economy will have every eye on it as the release of its GDP numbers draw near. As discussed last week, the UK disappointed with weaker-than-expected jobs data this week, bringing with it concerns from analysts. This disappointing GDP report would make for some lucrative short positions on the British pound (GBP) and signals exactly what is seen in the chart below. Market sentiment fluctuates as traders try to decipher what it means. Traders are especially fixated on this development, with far-reaching implications for financial markets.
We’ve seen very little volatility in the most recent employment report. Many opportunistic traders interpreted this as the ideal opportunity to short the beleaguered currency. Traders want to see bigger surprises in the data to kickstart trading flows. The prospect of a miss in upcoming UK data adds further uncertainty to the GBP, compelling traders to reassess their strategies.
Given all of this, the Autumn Budget expected later this month is attracting a lot of scrutiny. Analysts forecast grim news for the GBP. This is making for a confusing and frustrating picture for investors trying to see what lies ahead in the UK market.
Australian Job Market: Positive Signs Ahead
Unlike the UK, Australia’s labour market is expected to continue improving. Additionally, the unemployment rate for September is projected to drop from 4.5% to 4.4%. That means economic development – and particularly job creation – is set to explode. It looks like all these combined would boost estimates by about 20,000 jobs (up from last month’s gain of 14,900).
All these indicators, although getting better, might help restore confidence in the Australian economy and have a positive effect on market sentiment across the Asia-Pacific. Overnight, stock markets across this modest area of booming economic development jumped with joy. Softer US employment numbers renewed optimism over global economic conditions and monetary policy expectations.
Investors are currently pricing in about 16 basis points of easing for the Federal Reserve’s December meeting. This means there is only a 35% chance of any such policy shift actually occurring. In this environment, risk appetite and investment strategies are probably going to be a lot more sector and asset class agnostic.
Implications for Global Markets
Possible US government shutdown resolution would send markets soaring. Moreover, UK and Australia’s soon-to-come economic data will continue defining these dynamics. The resolution in Washington should deliver greater stability to US markets, helping to shape global investor sentiment.
As market participants look ahead at important economic reports and anticipate their importance, they are cautious to monitor how the market reacts. Widening divergences of data points has the potential to introduce dramatic volatility to currency pairs and equity markets. This is particularly the case for UK pound (GBP) and Australian dollar (AUD).
The relationship between these factors shows how closely linked our global economies and financial markets are. Investors will be paying keen attention as they look to get through this period including uncertainty and speculation.