Amplify Weekly Strategy: 5th - 9th Nov 2018

Calendar highlights

Monday: EU Sentix Investor Confidence, UK Services PMI, US Final Services PMI, ISM Non-Manufacturing PMI, CA BoC Governor Poloz speaks

Tuesday: AU RBA Rate Decision, UK BRC Retail Sales Monitor, GE Factory Orders, SP/IT/FR/GE/EU Final Services PMI, UK 10-yr bond auction, EU PPI, US JOLTs Job Openings, IBD/TIPP Economic Optimism, 10-yr auction, Weekly API Inventories, Congressional Elections

Wednesday: NZ Employment Change, Unemployment Rate, Inflation Expectations, GE Industrial Production, UK Halifax HPI, EU Retail Sales, GE 10-yr bond auction, CA Ivey PMI, Weekly DoE Inventories, 30-yr bond auction

Thursday: NZ Rate Decision, Press Conference, JN Current Account, Core Machinery Orders, BoJ Summary of Opinions, CN Trade Balance, UK RICS house Price Balance, GE/FR Trade Balance, ECB Economic Bulletin, EU Economic Forecasts, SP/FR 10-yr bond auction, CA Housing Starts, US Weekly Jobless Claims, FOMC Rate Decision

Friday: CN CPI/PPI, Foreign Direct Investment, Money Supply, New Loans, FR Industrial Production, UK Prelim GDP, Manufacturing/Industrial Production, Prelim Business Investment, Construction Output, Goods Trade Balance, NIESR GDP Estimate, US PPI, Final Wholesale Inventories, Prelim University of Michigan Confidence, Fed's Quarles speaks

During the upcoming week, 77 S&P 500 companies (including 1 Dow 30 component) are scheduled to report results for the third quarter.

Brexit headlines likely to intensify...

Cable saw a gap-up at the re-opening of trade following reports in the Sunday Times that senior sources close to the PM have secured private concessions from Brussels that will allow May to keep the whole of Britain in a customs union, avoiding a hard border in Northern Ireland. The paper also wrote that May is said to be on course to secure a political deal on a "future economic partnership" with the EU that will allow Britain to keep open the prospect of a free trade deal resembling that enjoyed by Canada.

There is no doubt the tempo of negotiations has picked up and last weeks near 3% bounce in cable makes clear how short the market is positioned with a string of positive comments seeing prices surge back above the 1.3000 handle.

Technically, the 50DMA has been a significant barrier to the upside price action experienced last week and as such we watch that level around 1.3052 with great interest. A breach of that level then targets the trend-line in play from the low of the year printed back in mid-August.

For now, I would advise being prudent with the duration of trades being executed in the intra-day environment as my expectations are that Brexit rumours will intensify in the coming days. In particular, sources at the weekend suggested the Cabinet meeting on Tuesday could be decisive.

"My expectations are that Brexit rumours will intensify in the coming days"

Democrats to take the House...

I have been surprised by the markets lack of interest in the upcoming US mid-terms. This may well be explained by the fact it is widely anticipated the House will turn back to Democratic control. Below is the calculation by the famous statistician Nate Silver of FiveThirtyEight.

From a reaction point of view, if that baseline scenario materialises then I would not be expecting much in the way of fireworks. In fact, I think one of the several catalysts for the rout in US equity markets through October was due to the expectation that Trump will be somewhat limited by congressional deadlock, lessening the chance of further fiscal stimulus of the magnitude once promised.

As always, preparation is essential for trading these big isolated events and although I think the outcome of the elections is relatively clear it would be prudent to plan for two other possible alternatives.

1 - Republicans keep control. I would see this as positive for US stocks, USD and yields in the initial reaction. However, medium to long-term is could become the opposite if the economy heats up too fast requiring a steeper rate trajectory from the Fed, coupled with a worsening fiscal situation. So, it depends here on your time horizon. For us this would be a intra-day buy.

2 - Democrats win both chambers. I see this is incredibly unlikely and as such would be the most market moving given how far away this is from expectations. This would be an immediate sell in US equities and the USD as political gridlock would jeopardise US economic activity and raise the prospect of a Trump impeachment, which although would likely tantamount to nothing, would increase political uncertainties and detract from focusing on the economy.

Here's a great infographic by the team at ING Economics and you can access their full report for more in-depth analysis HERE.

From a technical stand point my colleague Sam north (@snorth19) has noted the 200DMA in the S&P 500 futures is an important level to the upside to watch this week and was a clear point of resistance when the market rallied sharply at the end of last week.

For a more thorough review of what else is happening this week you can refer to the morning briefing accessible on our YouTube channel HERE.

Remember to subscribe to our channel and hit the notification alert button to receive our updates each morning at 10.30am or live via Trading-Live.com.

Have a great week ahead.

Anthony

Photo by Steve Harvey on Unsplash

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