Daily Management Review

Investors are preparing for a bumpy September


09/05/2017


The S&P 500 index is declining as the situation in the Korean peninsula is worsening and flooding in Texas keeps bringing unpleasant consequences. Unfortunately, this is only the beginning. September 2017 promises a lot of large-scale events and events that will set the tone for financial markets before the end of the year. We are expected to meet the largest central banks, elections in Europe and Oceania and the approach of the ceiling of the US national debt. Here are some of the most significant events.



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Central Banks Attack

Fate of the currency and credit markets will be determined by outcome of the meetings of the main financial institutions of a number of countries. The euro is likely to rise in price if the European Central Bank (ECB) declares plans to reduce the quantitative easing program.

Earlier, the head of the ECB Mario Draghi said that the regulator will discuss this possibility in the fall, but refused to explain whether this will happen next Thursday. The monetary policy committee of the bank will have to take into account the significant growth of the European currency in recent times - now it is at the highest level for the last two-odd years.

In the meantime, the situation with treasury bonds in the US should alarm Fed officials if they are going to begin to normalize the balance already in September. This time, the central bank announced its intentions in advance to avoid a repeat of the hysteria of 2013.

So far, the yield of 10-year T-bills has been kept at the minimums since the beginning of the year, and stock indices are lingering at historic highs. Yet, there is no hope that this state of affairs will continue in the future, warns the chief economist of Deutsche Bank, Thorsten Slock. He said in an interview with Bloomberg: "Now that we are on the verge of normalization, I do not see any articles or statements about the negative impact of this process on the stock market, the expansion of credit spreads or the increase in bond yields. The impact of both programs on the economy should be symmetric: if quantitative easing had exceptionally positive consequences, then normalization by definition will not do without negative ones. "

No representative of the Bank of Canada has spoken since the first in almost seven years of raising interest rates, but CIBC senior economist Avery Shenfeld is confident that the next meeting will surely bring surprises (it will be held on Wednesday this week). After the publication of statistics on GDP (the pace of development of the Canadian economy jumped to 4.5%), he wrote:

 "The bank now sees that the economy does not need low interest rates for high growth."

The British pound has another problem: unlike the euro, it fell to a minimum weighted trade level since October 2016. The decline is clearly not eluded by the attention of the Bank of England. The problem is that weak economic indicators and negative real wage growth have tempered any expectations of a shift in the central bank's policy towards higher rates.

Meetings of the central banks of Japan, Australia, Russia, Mexico and Brazil will also be held in September.

Ceiling of the US public debt

September is a difficult month for investors in stocks. Since the Second World War, indices were down in September on average by 0.7%, reports Bloomberg with reference to S&P Global. In 60% of cases, stock markets finished the month in the red.

This year, the situation is complicated by approximation of the ceiling of the national debt in the United States. Finance Minister Steven Mnuchin called September 29 a "critical deadline," to which Congress is required to pass a law on raising the limit of borrowing.

Jefferies’ economist Ward McCarthy says: "Prepare for a bumpy September. Balancing on the brink of disaster is likely to become a driving force in the negotiations to raise the ceiling of the national debt. "

Mnuchin insists that, in any event, the government will pay its obligations. Judging by the behavior of the yield curve of treasury bills, traders are more skeptical.

Wall Street is already preparing for the "end of the world". And President Donald Trump has aggravated the situation by promising to close the government if Congress does not approve funding for the construction of the wall along the southern border. At the same time, Mnuchin said that the program to help the regions affected by Hurricane Harvey should be tied to raising the ceiling of the national debt.

Elections

There is one more reason for the tension in the financial markets - several countries will hold elections in September. Even if they do not present such surprises as Brexit or Trump's victory, some uncertainty still persists. It is expected that the party of Angela Merkel will win the parliamentary elections in Germany on September 24. The Chancellor is to form the ruling coalition - but with whom?

Her choice will determine the future of Europe's largest economy. Oskar Niedermayer, a political scientist at the Free University of Berlin, warns that each of the potential partners "has its own pitfalls." Some of them will considerably complicate the negotiation process for Brexit.

The elections in Norway and New Zealand will be held on 11 and 23 September, respectively. The main risk is that opposition parties may form a coalition government. However, any uncertainty first of all will hit the domestic assets of these countries. But that is not all. Here are other factors that may affect the financial markets in September:

The summit of BRICS leaders, organized by China, has just ended;

Trump's team is still working on the revision of NAFTA; 

Brexit negotiations continue in Europe;

Primary applications for unemployment benefits in the US will show what impact the hurricane Harvey has done on the country's economy. Morgan Stanley economists point out that the peak of impact falls on the third week after the end of the storm;

@realDonaldTrump will probably publish new messages on Twitter;

And, of course, there is the debut of iPhone 8.

Alas, the situation will not improve in the next month either: the referendum on the independence of Catalonia is scheduled for October 1.

source: bloomberg.com






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