Amplify Weekly Strategy: 15th - 19th October 2018

Calendar highlights

Monday: CN Foreign Direct Investment, M2 Money Supply, New Loans, US Retail Sales, Empire State Manufacturing, Business Inventories, Federal Budget Balance, Treasury Currency Report, CA BoC Business Outlook Survey, Bank of America earnings

Tuesday: CN CPI, PPI, AU RBA Monetary Policy Minutes, NZ CPI, GE Import Prices, ZEW Economic Sentiment, UK Average Earnings Index, Claimant Count Rate, EU Trade Balance, US Industrial Production, Capacity Utilisation, JOLTS Job Openings, NAHB Housing Market Index, Weekly API Inventories, TIC Long-Term Purchases, BoE Cunliffe speaks, Goldman Sachs, Morgan Stanley, Johnson & Johnson, Netflix earnings

Wednesday: UK CPI, RPI, PPI, European Council review Brexit, EU CPI (F) GE 30-yr bond auction, US Building Permits, Housing Starts, Weekly DoE Inventories, FOMC Minutes, RBA Debelle, Fed Brainard, ECB Weidmann, BoE Broadbent speak

Thursday: JN Trade Balance, UK Retail Sales, SP 10-yr bond auction, EU Economic Summit, US Weekly Jobless Claims, Philly Fed Manufacturing Index, CB Leading Index, CA ADP Employment Change, Fed Quarles speaks, AMEX, Philip Morris earnings

Friday: JN National CPI, CN GDP, Fixed Asset Investment, Industrial Production, Retail Sales, Unemployment Rate, EU Current Account, UK PSNB, US Existing Homes Sales, CA CPI, Retail Sales, BoJ Kuroda, BoE Carney, Fed Bostic speak, P&G, Schlumberger earnings

Big week for Sterling ahead...

Intra-day cable traders will be salivating at the prospect of what's to come this week with a potent cocktail of both political and economic risks on the menu. Starting with Brexit, where the latest talks this weekend aimed at breaking the deadlock failed to achieve any meaningful results. Once again, the sticking point remains the agreement on how to tackle the customs situation between Northern Ireland and the Republic.

The latest breakdown in negotiations raises the prospect that no deal is agreed at this week's meeting in Brussels which ratchets up the pressure for the emergency gathering in November. This being said 'if' something more concrete is agreed over the coming days then the GBP could be susceptible to some steep moves to the upside, but our baseline scenario is that officials will remain in deadlock resulting in increased bets of a 'no deal', strengthening the case for the bears.

This week is also important economically for the UK, as we see the latest wage data (Tues), CPI (Weds) and retail sales (Thurs) reports. Although I feel this will be secondary to the Brexit saga, if the numbers point in the same direction as the outcome of the meetings in Brussels (i.e. impasse in talks and weak data) then cable could well come under persistent pressure should US economic data (Retail Sales, Empire State Manufacturing, Industrial Production) continue to outperform.

The final area to be aware of for Sterling traders is the scheduled speakers due from the Bank of England with Cunliffe on Tuesday, Broadbent on Wednesday and Governor Carney on Friday.

She loves me, she loves me not...

The love hate relationship between the US and China continues, with attention on this week's release of the Treasury's currency report and whether or not China is labelled a currency manipulator. Source reports last week suggested that this may not be the case, and given the fragility of US equity sentiment, the exclusion of China on the list would certainly help mitigate the growing negativity that has materialised in the US equity market over the last week.

There are also some key economic data points from China littered throughout the coming days culminating in the latest GDP reading on Friday. These data points warrant monitoring closely given sensitivity to pressure on EM's acting as a key component for some of the market's recent moves.

The Kingdom strikes back...

WTI crude has started the week on the front foot as the Saudi foreign ministry has threatened to respond to any punitive measures implemented by the US following Trump's warning of "severe punishment" should the Kingdom be linked to the disappearance of journalist Jamal Khashoggi.

Although this marks an unusually confrontational response from the Saudi, I do think that calmer heads will prevail, and after making a political point, history has proven that on most occasions petroleum outweighs any political disagreement.

From bad to worse...

Although the EUR is relatively stable this morning all is not well in the heart of mainland Europe. This comes as the prospects of political harmony, and Angela Merkel's re-appointment as German Chancellor, come back under the spot light following the loss of the CSU's absolute majority in the Bavarian election on Sunday.

As was the case in the national election of 2017, the biggest benefactor of the flagging popularity in the grand coalition has been the far-right Afd, with the Green party actually placing second. The next test for Frau Merkel now comes at the Hesse election on the 28th of October.

From a trading point of view this is an area to monitor and the lack of reaction this morning I think is telling in that the diminishing powers of the government as broadly expected and has been the case for some time. However, any flash headlines bringing into question the relationship between the CDU and CSU would be meaningful for short-term price fluctuations, but our baseline scenario is that Merkel muddles through to the CDU convention in December bruised but not beaten.

The final consideration is reserved for Italy and with all the headlines over the last two weeks it's easy to forget that the European Commission only officially gets its hands on the proposed Italian budget later today. As such, any initial commentary on reaction to the document is likely to be market moving for Italian yields and subsequently the EUR currency.

If you missed the morning briefing today, then you can access a recording HERE.

Have a great week ahead.

Regards,

Anthony