Investors strap themselves in for another volatile week amid a raft of crucial data releases

Macro Outlook

As Mario Draghi continues to talk down the euro, a decline in the value of the single currency is one of a very few aspects of the Eurozone economy that is going in his favour. However, although a falling value of the euro should be help Eurozone competitiveness, there is very little evidence of it impacting economies. Key German sentiment gauges such as the ZEW, the Ifo and manufacturing PMI continue to deteriorate as the economy moves towards contraction in Q3. An economy that is the engine room of the Eurozone is grinding to a halt. However the monetary actions of the ECB are struggling to impact, as the first tranche of Targeted Long Term Refinancing Operation disappointed at €82.6bn (less than a quarter of the €400bn on offer) as Eurozone banks shunned ultra cheap loans. However, as he often alludes to in recent times, Draghi does still have one card left to play, quantitative easing, which he says the ECB is ready to use. This could be just another case of talking down the euro, but as inflation is expected to fall again this week to +0.3%, outright deflation is edging ever closer. The fear is that the ECB is already behind the curve, with the monetary actions of today supposedly taking between 18/24 months to effect. Still, Draghi can be content in one thing, the euro continues to go lower.

Must watch for: US Non-farm Payrolls

Impact: Despite wall-to-wall tier 1 economic data, Friday’s Non-farm Payrolls remains the key event. The FOMC seems to be becoming increasingly hawkish as economic data improves and the payrolls report is seen as a key benchmark. Weekly jobless claims recently fell below a 4 week average of 300,000 and bodes well for continued strong NFPs. Last month’s disappointment was seen as a blip so the prospects of an upward revision will be high. Look for average earnings growth beating the +0.2% forecast and rising participation to drive further strength in the dollar and US equities.

Foreign Exchange

The story of the forex markets in recent weeks has been of the considerable dollar strength. The last week has seen a confirmation of the breakout to new 4 year highs on the Dollar Index (.DXY). Furthermore, the strength of the run higher suggests considerable backing to this dollar rally and there could be further to come. The next key resistance does not come until 88.4 on Dollar Index which gives the potential for at least another 3% upside from current levels. Strong US data continues to be the driving force which is enabling Fed members such as Richard Fisher (admittedly a hawk on the FOMC) to suggest that there could be a Fed rate hike as early as spring next year. We have a huge amount of tier 1 economic data from the States including the PMIs and of course Non-farm Payrolls. We could be therefore in for another volatile week in the forex markets with an overriding strong dollar bias. If you add in key Eurozone data releases such as a crucial inflation figure and ECB monetary policy, we could be in store for another week of euro weakness and dollar strength.

WATCH FOR: Volatility being cranked up once more with tier 1 data across the board. Key focus for the euro comes with the Eurozone flash CPI and the ECB monetary policy. Commodity currencies will trade off the Chinese manufacturing PMI, whilst the US dollar will be driven by the ISM PMIs and Non-farm Payrolls

Indices

Investors will certainly be glad to see the back of another difficult September. Volatility has spiked sharply higher again over the past couple of weeks as investors have become increasingly fretful of the potential for a correction in equity markets and the need for portfolio protection. However, the corrective downside pressure that European markets have come under has been far greater than that in Wall Street, whilst the primary uptrends that are still strongly in force on the S&P 500, the Dow Jones Industrial Average and the NASDAQ. European indices look far more corrective and are still being hampered by the on-going geopolitical sparring with Russia. Ultimately though the Eurozone seems to be edging ever closer towards full blown quantitative easing which should be supportive for markets such as the DAX, CAC, FTSE MIB and the IBEX. The FTSE 100 though is being held back by drastic underperformance of the basic resources sectors (a play on slowing growth in China) and the Banks which continue to be hit by regulatory fines. Still, with just over a week until the Q3 earnings season begins, perhaps there is a light at the end of the tunnel after all.

WATCH FOR: A raft of tier 1 data to drive indices. The markets could remain subdued until Wednesday, when the manufacturing PMIs are released along with the US ADP Employment. Draghi hinting at QE could support Eurozone indices on Thursday. Friday is dominated by US employment and thus could be volatile.

Other Assets: Commodities & Bonds

Despite the continued strength of the dollar acting as a downward force on commodity prices, in the past week the prospects of some safe haven support for the precious metals prices have picked up. An initial uptick was seen on the news of the engagement of airstrikes on Islamic State positions, whilst there were further safe haven inflows on news that Russia was ready to step up counter sanctions on the West. This may help to provide traders with selling opportunities as the dollar strength is set to continue. Expect elevated volatility this week with such a raft of tier 1 data.

Weakness on the equity markets has also helped to drive sovereign bond yields lower recently. Eurozone yields are being driven lower again as Mario Draghi verbally hints strongly at further unconventional measures that could be engaged by the ECB. Disappointment in this week’s Eurozone Flash CPI and PMIs would exacerbate this move. US Treasuries are also lower but could be supported by strong US economic data which could influence the Fed’s own monetary policy.

WATCH FOR: With such an enormous amount of key economic data focusing on the US with consumer confidence, ISM PMIs and the crucial employment reports sure to impact the dollar and subsequently commodity prices. US Treasury will be data driven with strong US data driving yields higher.