Three Key Events Set to Shape the Markets this Fall

News moving the markets in 2019 has revolved around a handful of central themes including dovish central bank policy across the globe, the ongoing trade war between the U.S. and China, Brexit and a rising number of indicators pointing to a global economic slowdown. In this article we’ll look at three major events ahead and how their outcomes could impact the market.

 

FOMC Meeting September 17-18

In July of 2019 the Federal Reserve lowered interest rates for the first time since the financial crisis of 2008. The rate cut was viewed as an insurance against inflation and economic uncertainty caused by President Donald Trump’s trade war.

The market now eagerly awaits the outcome of next week’s Fed meeting taking place on September 17th and 18th. Speaking in Zurich last Friday, Fed Chair Jerome Powell said that the U.S. central bank will continue to act “as appropriate” to sustain the economic expansion. His comments underpinned expectations that another rate cut will be announced. The CME Fedwatch tool currently forecasts an 86.5% chance of a quarter-point rate cut.

Nevertheless, opinion within the Fed is mixed. Boston Fed President Eric Rosengren is in favor of holding rates steady. In a recent speech he pointed to healthy U.S. consumption and employment and the limited space to reduce rates. Meanwhile, others such as St. Louis Fed President James Bullard have called for a half-point rate cut. Bullard has cited a need to get ahead of market expectations and insure against fallout from the trade war.

On Wednesday, President Trump on tweeted his view that the central bank should lower interest rates to zero or even below, calling Fed officials “boneheads”. Powell had affirmed the Fed’s independent stance earlier, stating; “Political factors play absolutely no role in our process, and my colleagues and I would not tolerate any attempt to include them in our decision-making or our discussions.”

Currently, the market expects a quarter-point cut next week, one more reduction before the end of this year and another in early 2020. Rates being kept on hold at the September meeting will likely pressure stocks, while a greater than expected half-point rate cut could trigger a rally in stocks, pressure the dollar and boost gold prices.

 

US/China Trade Talks Early October

The trade war between the U.S. and China which began in January of 2018 has resulted in the economic superpowers imposing tariffs on billions of dollars worth of one another's goods. Fears stemming from the ongoing conflict is limiting business appetite for investment and threatening global economic growth.

A paper published by the Federal Reserve in early September suggested that uncertainty driven by the trade war could result in hundreds of billions of dollars in lost U.S. output and as much as $850 billion lost globally through early 2020.

China’s economic growth fell to its lowest level in 27 years in the second quarter, reflecting the toll of the trade war on the world’s second largest economy. Meanwhile, U.S. manufacturing activity contracted for the first time in three years in August, with new orders and hiring falling amid trade tensions.

On Monday, Treasury Secretary Steven Mnuchin told Fox Business that the U.S. and China have a “conceptual” agreement on enforcement concerns and affirmed that progress has been made. However, he also warned that President Trump will keep imposing tariffs if a deal cannot be reached.

Markets cheered the news that the U.S. and China agreed to meet next month in Washington to discuss trade. While expectations for a major breakthrough at the talks are relatively low, investors are relieved to see negotiations resuming. The announcement came after after both countries imposed new tariffs on each other’s goods at the start of September. Many analysts are sceptical over a deal being reached before the 2020 U.S. presidential elections and global equity markets will continue to be pressured if trade tensions rise. The U.S. dollar has benefited as a safe-haven during the trade war while emerging market currencies have depreciated sharply.

 

Brexit Deadline October 31st

Brexit, the scheduled withdrawal of the United Kingdom from the European Union, is due to take place in just seven weeks. The U.K. parliament is currently in recess after being suspended for five weeks by Prime Minister Boris Johnson. The controversial move was ruled unlawful by Scotland’s highest civil court on Wednesday.

The potential outcomes of Brexit remain wide open, ranging from a disorderly ‘no deal’ Brexit to a second referendum that could result in the United Kingdom remaining in the European Union. On September 4th, Members of Parliament voted to pass a law that would force Johnson to request a three-month delay to Brexit to January 31, 2020 if a deal with the EU has not been reached.

An orderly Brexit could take place on October 31st if Johnson is able to secure a deal with the EU that wins the approval of a majority of MPs. A ‘no deal’ Brexit is also still possible, if Johnson wins an upcoming election.

The prospect of a ‘no deal’ Brexit has driven the pound sharply lower and the Bank of England has warned that such a scenario could leave sterling at record lows against other currencies.

 

The Bottom Line

With the S&P 500 edging towards record highs on Friday, market sentiment is currently lifted by optimism over improving trade relations and yesterday’s announcement of aggressive stimulus from the European Central Bank (ECB). The market now turns its eyes to the Fed meeting next week and the expected quarter-point rate cut.