The following five big themes are likely to dominate thinking of investors and traders in the coming week.
1. Put up or Shut up
It is not only Donald Trump’s tax cut plans, various White House scandals and non-farm payrolls that will keep markets focused on the United States next week. On Friday, there is also the small matter of an expiring deadline on funding needed to keep the government open.
Congress can either approve a huge bill which would see Washington though until Sept 30, 2018, pass a shorter extension of current funding, or do nothing at all and risk a partial shutdown.
The US Treasury also hits its limit on borrowing and although it is likely to take steps to postpone the immediate need for Congress to take action, it all points to yet more US debt.
These rows can also do serious damage. The United States lost its prized 'AAA' credit rating in 2011 in the aftermath of one such showdown and history shows the uncertainty they cause can have an impact, albeit short-term, on consumer confidence and the jobs numbers.
2. Muscles from Brussels
There’s one thing and one thing only that’s driving sterling these days – Brexit.
Look at its gyrations this week, it chalked up its biggest rise in over seven months on Wednesday after EU diplomats said Britain had moved “close” to EU demands over Brexit. It hit a two-month high above $1.35 the following day. On Friday though, it had its biggest fall in three weeks on concerns about the Irish border and media reports that London’s Brexit negotiator David Davis could resign over an internal party issue.
Next week, the Brexit negotiations enter a key phase. Prime Minister Theresa May is due to meet European Commission President Jean-Claude Juncker and his chief Brexit negotiator, Michel Barnier, in Brussels for lunch on Monday.
If that meeting is deemed by Brussels to have produced sufficient progress, EU leaders could give a green light to trade talks at a summit on Dec 14-15, reducing the risk of a “hard Brexit”. Watch the pound.
3. We have lift-off
South Korea became the first major Asian central bank since 2014 to hike interest rates this week. It is a sign the ‘great unwinding’ of crisis-era low interest rates is spreading and resurgent growth in Europe and the United States is benefiting Asia too.
So who is next? Further south, Australia is expected to keep rates on hold next week but there will be focus on whether there is any hint of a possible hike next year.
Malaysia and the Philippines could well nudge rates up next year too, as their booming economies see higher inflation which is pushing ‘real’ interest rates further into the dirt. There is also China trade data which will provide the latest pulse reading for Asia’s industrial powerhouse.
4. Bubbles brewing?
Skittishness on tech stocks as bubble fears gain more traction and high expectations for a US tax reform bill have sparked a rotation from the ubiquitously popular tech sector into banks which stand to gain from lower tax rates.
Inflows to US financials stocks hit a 21-week high, Bank of America Merrill Lynch said on Friday, while global tech funds, which have drawn some of the biggest flows this year, saw their first outflows in eight weeks after hoovering up $6 billion in the past six weeks.
Tech stocks have a fairly low tax rate already, so they’re among the sectors seen as benefiting the least from any tax cuts that eventually materialize.
Tech is also being impacted by fears that valuations, which have reached dizzying heights this year, are floating into bubble territory.
And it is not only stocks. Bitcoin is the other big imponderable. The cryptocurrency smashed through $10,000 and then $11,000 this week, before promptly plunging 20 percent. Who knows what will happen if this particular bubble bursts.
5. Talking Turkey
Turkey will be in the spotlight again next week as investors await fresh revelations from a US trial involving a Turkish-Iranian gold trader.
Reza Zarrab, who is cooperating with US prosecutors in the criminal trial of a Turkish Halkbank executive accused of helping to launder money for Iran, has already implicated President Tayyip Erdogan.
Turkey has dismissed the accusations of sanctions-busting as politically-motivated, with the aim of “cornering” Turkey and its economy. The trial is threatening funding for Turkey’s dollar-dependent banks, with investors fretting about potential fines or even sanctions from US regulators.
Markets will also be watching Turkey’s November inflation print, due on Monday. After a battering for the lira it could easily breach 12 per cent and that would crank up the pressure for action from the country’s central bank.
