1. Fed up
It’s a huge week for central bank meetings across the globe.
The third Federal Reserve interest rate rise of the year is due Wednesday, with markets hungry to hear how many more might be in the pipeline for next year while they flatten the yield curve on fears over just how aggressive the FOMC might be.
Fed chair Janet Yellen may well wax lyrical alongside the dot plots, but the fact she won’t be around to see 2018 through means a certain amount of fog descends. Investors are also trying to figure out just how much gasoline the big Trump tax cuts throw on a nicely blazing economy.
Europe’s top two – the ECB and Bank of England – hold their final meetings of the year on Thursday, though it’s highly unlikely either will rock the boat policy-wise. For the BoE, that’s partly because visibility on the Brexit-bound UK economy stretches only to the end of its nose.
Emerging markets will see the real action. Russia is expected to trim its rates again with inflation there at a record low, but Turkey should and Mexico could go the other way. Indonesia, Colombia, Ukraine and Philippines also hold rate meetings.
2. Looking to the futures
Bitcoin fans saw the cryptocurrency blast past $19,000 and then promptly plunge 20% to this week but are salivating over the potential for some longed-for legitimacy when futures trading launches this weekend.
The first CBOE exchange trades should print Sunday night at 2300 GMT, followed a week later on CME Group’s CME exchange and Nasdaq next year.
Traders are speculating what all this will do to the hyperactive price moves. Since August 2011, bitcoin has averaged a daily price change of nearly 3%, up or down. That compares to less than 0.5% for the euro-dollar rate EUR= since the euro’s introduction in 1999.
3. From Me to EU
Britain and the EU reached an 11th-hour deal on Friday covering the Irish border question that allows the second phase of Brexit negotiations, on future trade relations, to proceed. It was a typical European fudge, pushing the tough negotiations on the details of what will be extremely complex trade and regulatory issues into next year.
Sterling initially rallied to a 6-month high against the euro but then slumped, posting its biggest daily fall in two weeks against the euro and three weeks against the dollar. Sterling trading is becoming increasingly choppy – the difference between sterling/dollar volatility and euro/dollar last week was the widest since the UK general election in June.
The pound will remain highly sensitive to Brexit headlines and official commentary next week too despite Friday’s breakthrough. Next up is the EU leaders’ summit in Brussels on Dec. 14-15.
4. Weakest links
Crunchtime looms for Turkey and South Africa, the emerging market weak links. Turkey’s central bank should deliver at least 100 basis points in policy tightening at its Dec. 14 meeting to counter double-digit inflation and keep foreigners keen on its bonds. Any less and the lira may slide back to record lows against the dollar – it is currently 4% off that level.
South African markets will likewise be volatile ahead of the ruling ANC party’s Dec. 16-20 conference to elect a new leader. Expectations of a victory for businessman Cyril Ramaphosa have lifted South African markets but these gains could reverse should his rival Nkosazana Dlamini-Zuma take the lead in polls. The outcome of the vote could determine direction for the rand and central bank policy.
Bond yields in both countries have surged this year in contrast to broader emerging markets where yields are down – average Turkish yields at 12.5% are double the emerging market average, while South African bonds pay 9.8%.
5. Exerting some deleverage
China is due to release key data next week including industrial output, retail figures, investment, house prices and the latest loan growth numbers.
The big question most economists and investors are asking about China at the moment is whether Beijing can achieve its main aim of deleveraging – and making the financial sector less risky – but at the same time keep economic growth on its steady glide path.
For EM equities followers there is also the spiralling influence of Tencent and Alibaba which are now so outsized in some of the key global EM stocks indices that the merest sniff of a slowdown in the world’s number two economy could cause trouble.