The end of January is marked by a constant change of moods in financial markets and among investors. On the one hand, fear of the spread of the coronavirus increased and calculations appeared regarding the impact of this event on the GDP of China or Japan, and on the other hand, the correction on the stock market was used to reach new historical highs on US or Germany stock exchanges.
The beginning of the new week brought a return of fear and a decline in stock indices from record levels. Futures on Wall Street indicate a potential lower opening, which could mean a continuation of Friday's sell-off. Declines have already occurred across Asian stock exchanges and are continuing in Europe. The retreat from shares seems to be accompanied by an increase in demand for bonds or gold. The VIX fear index contract also increased. In addition to stock market indices, the price of oil also dropped significantly. A barrel of WTI oil is the cheapest since October 2019 and approached the level of USD 50. Meanwhile, currencies directly and indirectly connected to the Chinese economy recorded the largest losses on the currency market, i.e. the Australian dollar (AUD) and the New Zealand dollar (NZD), losing more than 0.5 percent to the US dollar in the morning.
The last week of January is likely to be marked by greater volatility in many markets. In addition to events from China, investors can also observe central bank meetings and macroeconomic data. On Wednesday at 20:00, the Fed's decision on interest rates will be published, and the press conference of Fed President Jerome Powell will be held at 20:30. It seems that currently, the US Federal Reserve has neither grounds nor a need to change interest rates after three cuts in 2019. Nevertheless, the situation may change in the second half of the year. The interest rate market estimates that from September the chances for another cut of the federal funds rate to the range of 1.25-1.50 percent will start to prevail. In turn, in December the chances for a cut exceed 73 percent.
On Thursday, the last meeting of the Bank of England with Mark Carney as governor of this institution will be held. We have recently observed an increase in market chances for interest rate cuts, however, the market consensus doesn’t confirm that. What is about to change, however, is the distribution of votes within the MPC (Monetary Policy Committee). Instead of 2 members voting, 3 members may have to vote for interest rate cuts. Hence, if there is no cut, investors' attention could be directed to the distribution of votes between hawks and doves.
Brexit will also be a key event for the pound this week. More than three years after the referendum, Great Britain will leave the European Union on January 31. Earlier, this coming Wednesday, January 29, the European Parliament will vote on the agreement for the UK to leave the EU. From the perspective of the options market, the weekly implied volatility is the highest for the British currency among other major world currencies.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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