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Tuesday 24, October 2017 by Jessica Combes

Searching for new catalysts

 

Hussein Sayed, Chief Market Strategist at FXTM, provides an update on the financial markets.

Who’s the next Fed Chair? US equity investors decided to pull out some profits on Monday, after Wall Street’s major indices posted new intraday records at the opening. The S&P 500 ended 0.4 per cent lower, while the NASDAQ Composite Index and Dow Jones Industrial Average declined 0.6 per cent and 0.2 per cent, respectively. Although markets seem to be relatively quiet, the CBOE’s Volatility Index (VIX) logged the largest one-day gain in nearly seven weeks, closing above 11 - an indication that option premiums on the S&P 500 are rising, which could be an early sign that investors are protecting their portfolios from a possible pullback. 

Earnings should continue to be the major driver this week, with more than a third of S&P 500 companies due to report their third quarter results. Many investors have joined the rally on tax reform hopes; this is evident in the small-cap Russell 2000, which has rallied more than 10 per cent since mid-August. How much further the rally persists on such pro-growth policy hopes remains to be seen, especially since a considerable amount has been priced in since the beginning of the year. 

Investors are also in wait-and-see mode, as President Trump may announce his nominee for the Fed Chair this week. In an interview yesterday, he said he would name the new chair "very shortly.” I think his decision will not be just based on who’s the biggest dove, but of greater importance, is finding someone who is willing to de-regulate the financial sector. So far, Jerome Powell seems to be the best fit, but in the Trump era, we should always be prepared for surprises.

Currency markets are moving in very tight ranges early Tuesday, with the Euro trading within a 27 pips range. Although we heard some voices saying that the crisis in Spain could lead to the break up of the EU, the reaction in the Euro and EU fixed income markets are not supporting this theory. The main risk event for the single currency remains to be Thursday’s ECB meeting, and I do not expect significant moves until then. 

On the data front, preliminary PMI’s from Germany and France are expected to show continued strength in the manufacturing and service sectors, despite a slight pullback in German manufacturing. However, with only tier 2 economic data on the agenda, currency moves are likely to remain within tight ranges.