Monthly Market Outlook – September

CURRENCIES

Dollar: The Dollar has witnessed significant gains in August, following positive macroeconomic developments, including higher earnings, beating the GDP forecast and the US trade agreement with Mexico. Uncertainty regarding trade relations with China, despite the on-going negotiations, remains. The US economy appears to experience strong growth, with a rate hike expected at the next Fed meeting on September 26. Other important dates include CPI data on September 13, August retail sales on September 14, and the Fed’s favorite PCE index on September 28.

Euro: The Euro has remained strong and stable throughout August, a result of higher-than-expected GDP results and stable CPI growth. Markit PMI indices were slightly lower than the forecast but this did not affect the Euro’s performance. The most important date relates to the September 13 ECB meeting, with CPI data out on September 28. Brexit discussions have been postponed until mid-November.

Sterling: Still vulnerable due to Brexit and political news, the GBP also has to deal with the economy being on a declining growth trend since the Brexit decision in 2016. Important news for September include the BoE meeting on September 13, following the monthly GDP estimate for July on September 10 and just ahead of the CPI data on September 19.

Yen: Despite stronger than expected GDP results, the Yen recorded losses in August, perhaps due to a worsening in the trade balance, and a deterioration in confidence and the leading index. Bank of Japan meeting on September 19 is not expected to change policy rates, while the national CPI index results on September 20 should be suggestive of whether prices in Japan are showing any signs of movement.

Aussie: Australian banks have been facing increased funding costs with RBA attributing this to higher USD Libor costs, forcing banks to borrow from the local market. While the banking sector is in turmoil, the RBA is not expected to push through for a decision on the September 4 meeting, ahead of the GDP results out on September 5 which are expected to indicate strong growth.

Loonie: Canada has many incentives to join a trade union with Mexico and the US, specifically given the fact that many border jobs rely on trade. The overall impact from an agreement is expected to weight positively on the Loonie. No change is expected in the BoC meeting on September 5, with retail sales and CPI index numbers coming out on September 21.

Emerging: Mexico is expected to benefit from the new trade agreement with the US, once it passes through Congress, with the Peso expected to strengthen if this happens. ZAR faced strong pressure in August, as a result of Trump’s comments, and has been trading at highs since. TRY has continued its decline following a correction. Problems for Turkey appear to continue despite generous funding from Qatar and Russia and the Lira is expected to continue declining. The impact of sanctions on the Russian economy and the Ruble is expected to be much milder on the other hand, however, interest rate increases cannot be ruled out.

INDICES

US: The barrage of positive macroeconomic news has pushed all three indices (US30, US100, and US500) higher in August, to new record highs, as the markets expect these to be translated into higher company profits. The expected increase in US rates should lower the stock market’s growth momentum, albeit it should not stop it. The indices still have room to go, especially if Canada reaches an agreement with the US and retail sales show higher than expected consumer spending.

Europe: Stock markets in Europe recorded mixed results, based mostly on sentiment and despite the continuous improvement of economic performance. The GER30 recorded a boost in August following better than expected economic climate and despite the slight deterioration in the PMI indices. The EUR50 has been moving sideways as Spanish PMI recorded a large deterioration, while growth in countries such Italy remains weak. Greece’s exit from bailout shows signs of positive momentum in the region. In contrast, the UK100 moved mostly sideways in the last few months, a momentum which is expected to continue in the near future, at least until a clearer view about the UK’s future outside the EU can be estimated.

COMMODITIES

Gold: The downwards trend, observed since March 2018, as a result of higher world GDP growth, appears to have stopped. Uncertainty over US-China trade relations and the continued uncertainty regarding Brexit pushed it back up in late August, surpassing the $1,200 mark, after trading below that point for a fortnight. The upwards trend is expected to continue, slowing down in the case of a complete agreement between Mexico, US and Canada. A US-China trade deal and the lift of tariffs could also put downwards pressure on gold.

Silver: Closely correlated with the path of Gold, Silver has been on a downwards trend since June, after the ECB announcement that quantitative easing will stop by the end of the year. Further to this, the Fed’s intention to pursue a gradual increase of interest rates is also expected to have a negative impact on the price of Silver. While industrial demand for Silver is increasing, global macroeconomic factors suggest that the downwards trend could continue.

Oil: The world’s leading fuel has been on an upwards trend since early 2018, a result of an OPEC agreement to continue the cut in production until end-2018. The oil cartel reversed its policy in June, agreeing to boost production by 1 mln barrels a day, given an overachievement of the reduction target. The move was, however, interpreted more bullish than bearish, given the lack of details regarding which countries would actually increase production. Demand is mainly driven by the Asia Pacific region, as growth in consumption was anaemic elsewhere.

CRYPTOS

Bitcoin: The world’s most popular coin has continued its drop in price, reaching $6919 in late August, as a result of the large correction ever since the peak of December. The downwards trend has seen more upward spikes than other coins, as well as a more gradual reduction, perhaps more due to reputational issues rather than any other reason. The sideways movement in the past couple of months could be indicative of an indecisive market, however, each new peak appears to be lower than the previous one. This can either mean that the market has reached its trough and should stabilise in the near future or that another correction is to be expected.

Ethereum, Litecoin and Ripple have also been moving in a downwards trend, stabilizing at November 2017 levels. The trend, based purely on technical analysis, appears to continue its negative path for all three coins in the near future, especially if the decline in Bitcoin value continues. Given the strong correlation between the coins, unexpected movements in one should also affect the other, especially if they are in line with the longer-term price path.

BONDS

US10Year: Positive macroeconomic news for the US throughout the year along with the rate hike in March and strong expectations of another hike in September, as part of a larger plan for a gradual increase in the interest rates has forced yields to increase. The return of confidence in the US economy, combined with a favourable macroeconomic outlook, which assists in moving funds away from bonds and into riskier investments such as stocks, should assist in further increasing yields in the near future.

UK Gilt: The UK Gilt has remained relatively flat in the past months, registering a small upwards trend in price, despite the increase in the official interest rate on August 2. The bond is mainly affected by political rather than economic factors and postponing the meeting for a Brexit agreement to mid-November instead of October has only added to the existing uncertainty, as investors make a shift to “safety” given the uncertainty about the macroeconomic environment, as depicted in the declining growth rate of UK GDP and the sideways movement of the UK100.

EUBund: August marked a continuation of the slow upwards movement in the German 10-year bond, aided by the better-than-expected economic climate index, which pushed the GER30 higher. German economic activity is increasing steadily and inflation is also stable close to the ECB target rate, which should slowly but steadily also increase the Bund yield.