By Michael O’Neill
Year-end is fast approaching. It won’t be long before Christmas decorations are packed away and choruses of Auld Lang Syne echo through the night air. And worst of all, it is closer than you think.
The calendar may say there are still eighty more days left in the year but for financial markets, the year starts to wind down after US Thanksgiving. December is a short month for traders because of seasonal holidays which kick off in earnest on December 21. Before that, holiday lunches, and staff parties distract market participants. Many funds, financial firms and corporations reduce or halt trading altogether as they prepare to close their books for another year. If they have made a lot of profit, traders won’t want to risk their bonuses and if they lost money, they know December is a poor trading month with lousy liquidity.
Nevertheless, there is a lot of macroeconomic and geopolitical risk crammed into the remaining days which should lead to market volatility. The Bank of Canada, (BoC) Federal Open Market Committee (FOMC), European Central Bank, (ECB) and Bank of England (BoE) meet twice before year end. The FOMC’s last meeting is on December 19. It comes complete with a Summary of Economic Projections and a press conference.
Traders will continue to watch the Brexit negotiation developments. Negotiations are going down to the wire, and the United Kingdom and European Union are still far apart on many major issues. So is UK Prime Minister Theresa May and her Conservative party. She is at odds with many of her members of parliament over her Brexit plan. Another sticking point is how to avoid a hard-Irish border. There is hope. EU President Jean Claude Juncker sounded optimistic earlier this week when he suggested that a deal could be done in November.
President Trump pulled the US out of the Joint Comprehensive Plan of Action (JCPOA), the so-called Iran nuclear deal. In doing so, he is telling US allies and signatories to the agreement, that it is “his way or the highway.”
He re-imposed the pre-JCPOA Iran sanctions and threatened to hit any country, company, or individual with US penalties if they deal with Iran. The full weight of the sanctions begins on November 4. It could get ugly.
The EU is trying to skirt the sanctions, especially those pertaining to payments. They are discussing the creation of a “Special Purpose Vehicle” to facilitate payments. (Oil trades in US dollars) China has experimented with using its own currency. India, Iran’s second biggest customer for crude, said it would continue buying oil in November and was considering using rupees to pay for it.
President Trump is in the driver’s seat. European companies have already scaled back or pulled out of Iran fearing US penalties and loss of access to the American market.
The FOMC may end the year with a bang. The odds for another rate increase are about 75%, but the surprise will come from the dot-plot forecast if it indicates a higher interest rate trajectory in 2019. The ECB will get a lot of notice at their December 13 meeting. The quantitative easing program ends. Traders will be looking for guidance on interest rates despite President Mario Draghi saying ECB rates would be unchanged until the summer of 2019. The Bank of England is handcuffed by the Brexit negotiations. If there is an agreement or even an outline of an agreement, UK rates could rise.
The Bank of Canada is widely expected to raise interest rates by 0.25% at the October 25 meeting. Traders will be paying close attention for hints of another rate increase, perhaps as soon as January, thanks to the new US Mexico Canada Agreement on trade and robust economic data. The December 6 meeting could set the table for a January hike.
President Trump started a trade war with China, and it is heating up. On Tuesday, he repeated his threat to slap more tariffs on another $267 billion worth of Chinese imports. The President said China wasn’t ready to make a deal. He may be feeling a tad cocky following his successful beat-down on Canada, during the US/Canada trade talks.
China/US trade animosity was ratcheted up a notch earlier this week. Bloomberg reported about a massive China attack on hardware used by major American corporations including Apple, Amazon, and telecom companies. Amazon and Apple denied being hacked. The credibility of the article increased after the FBI arrested a Senior Officer with China’s Ministry of State Security and charged him with attempting to steal trade secrets.
The November 6 US mid-term elections could wreak havoc on financial markets if the Democrats manage to wrestle control of the House of Representatives and the Senate. One thing is certain, if the Republican’s improve their standing or just maintain the status quo, the world will be exposed to two more years of Trump Twitter bombs.
For financial markets, when it comes to year-end, time really does fly.