Week Ahead: Markets Will Seesaw On Contradictory Trade Rhetoric; USD To Rise

Investor sentiment regarding a settlement of the U.S.-Sino trade war has been whipsawed over the past two days, by contradictory headlines about progress toward an interim deal. Though U.S. President Donald Trump has characterized the situation as moving along "very nicely," he is, at the same time, also insisting a settlement will only be inked if it's the right deal for the U.S.

Without real clarity on the situation, expect markets to fluctuate in the week ahead. Risk assets such as stocks and commodities could easily drop, while safe havens such as Treasurys, the Japanese yen and gold might jump, as trading opens on Monday.

U.S. indices, including the NASDAQ, Russell 2000 and Dow Jones Industrial Average, ended the week higher, with the S&P 500 finishing at a new all-time high, driven by reports indicating a path toward a trade resolution was in the works. As a result, yields climbed to the highest since July and the dollar advanced to mid-October levels.

Over the weekend, however, uncertainty increased, a consequence of Trump’s own diametric rhetoric. The president characterized the Asian competition’s supply chain as “broken like an egg,” even as he assured the media talks were going well.

Trump denied the Chinese report that he'd agreed to start phasing out tariffs. But he also reiterated he'd be open to a deal, but only if it were appropriate for the U.S. All of which puts into question the continuation of Friday’s S&P record-setting, upward trajectory.

Nevertheless, the fact that investors were comfortable holding onto the most expensive stocks in history over the weekend, despite the possibility of unsettling news, is a testament to their confidence. Perhaps they believe that one way or another a deal is in the making and view noise as nothing more than negotiating tactics.

The S&P 500 climbed 0.26% on Friday to notch a fresh record close. Healthcare (+0.73%) and Technology (+0.56%) led the gains, while Utilities (-0.42%) and Energy (-0.41%) lagged.

For the week, the benchmark index added 0.85%, with Financials (2.47%) reaping most of the rewards, followed by Energy (+2.38%) Real Estate (-3.7%) and Utilities (-3.65%). The SPX gained for the fifth straight week, helped by better-than-expected corporate earnings which have caused recession fears to subside over the past month, providing an additional boost to investor sentiment.

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We have been advising about a massive bearish broadening pattern since January 2018. Last week was the first full week above the pattern. If the price climbs above 3200 and consolidates on top of the pattern, we would have to finally reverse our bearish stance to bullish.

Yields on the U.S. 10-year Treasury note climbed to 1.945, the highest since July 31. Technically, rates closed above the downtrend line since November 2018 for the second day, while extending a short-term uptrend after posting above the lower, September peak.

Bullish yields are the mirror image of the bearish outlook for Treasurys, which is bullish for equities—confirming our long-term analysis for the S&P 500 on the chart above.

Along with yields, the dollar climbed, for the fourth of five days. The USD hit its highest level since Oct. 14, bottoming out of its short-term downtrend and resuming its long-term uptrend along with its rising channel since June 15, 2018.

Conversely, gold extended its downtrend line, having posted a lower trough on Friday.

Oil climbed to its highest point since Sept. 24, along with its rising channel since early October.

h2 Week Ahead/h2

All times listed are EST

h3 Monday/h3

4:30: UK – GDP: expected to have fallen to 1.1% from 1.3% YoY while jumping 0.4% from -0.2% QoQ.

4:30: UK – Manufacturing Production: seen to have edged up to -0.3% from -0.7%.

h3 Tuesday/h3

5:00: Germany – ZEW Economic Sentiment: likely to have jumped to -13.0 from -22.8.

20:00: New Zealand – RBNZ Interest Rate Decision: forecast to be cut to 0.75% from 1.00%.

h3 Wednesday/h3

4:30: UK – CPI: seen to have edged lower to 1.6% from 1.7%.

8:30: U.S. – Core CPI: expected to rise to 0.2% from 0.1% MoM.

11:00: U.S. – Fed Chair Powell Testifies: Provided there's no market meltdown after Trump’s comments on trade after the weekend, we expect nothing more than the usual “the Fed is on hold but ready to act in case of an economic downturn,” during this two day testimony.

18:50: Japan – GDP: expected to slip lower, to 0.2% from 0.3% QoQ and drop to 0.8% from 1.3% YoY.

19:30: Australia – Employment Change: forecast to tick higher to 15.0K from 14.7K.

21:00: China – Industrial Production: probably declined to 5.4% from 5.8%.

h3 Thursday/h3

2:00: Germany – GDP: expected to remain flat at -0.1% QoQ, while dropping to -0.3% from 0.0% YoY.

8:30: U.S. – PPI: seen to jump to 0.3% from -0.3% MoM.

11:00: U.S. – Crude Oil Inventories: forecast to drop to 1.515M from 7.929M.

21:45: Canada – BoC Governor Poloz Speaks

h3 Friday/h3

5:00: Eurozone – CPI: seen to remain flat at 0.7% YoY and 0.2% MoM.

8:30: U.S. – Core Retail Sales: expected to have jumped to 0.4% from -0.1%

8:30: U.S. – Retail Sales: will likely rise to 0.2% from -0.5% MoM.

Written By: Investing.com