The annual meeting of the World
Economic Forum in Davos did not achieve any breaking headlines, especially that
Trump and Xi Jinping were absent. No answers were provided on what will happen
next in the US-China trade war, or on what terms the UK will divorce from the
EU. All we got was a downgrade to the global economy from the IMF, which has
already been priced in financial markets.
This week is certainly going to
be more meaningful, with the Federal Reserve’s first meeting of the year, US
and China returning to the negotiation table, another meaningful vote on
Brexit, US big tech earnings announcements, and top tier economic data.
Will the Fed continue
supporting the bulls?
The Federal Reserve will conclude
its two-day meeting on Wednesday. Investors will be focusing on whether the
tightening policy pauses. Given that many economic data were not released due
to the shutdown, it might be hard to assess how the US economy has performed.
Another factor that’s likely to contribute to Fed caution is a no guarantee of
US and China reaching a trade deal prior to the March 1 deadline. While
policymakers will not update their economic projections, going forward every
meeting will be followed by a press conference by Fed Chair Jerome Powell. If
the term ‘patience’ appears again, it would suggest no rate hike will occur in
the first quarter, maybe not even in the first six months of 2019. This is
likely to be good for equities but may hurt the US dollar.
Deal or no Deal?
US and China are returning to the
negotiating table this week in an attempt to end the ongoing trade war. Vice
Premier Liu He will meet his US counterpart Trade Representative Robert
Lighthizer on 30 and 31 January. While we do not expect a final deal to be
drafted this week, all investors are hoping for is the meeting to end with big
smile on both faces, followed by statements indicating great progress has been
achieved. If no statements were to
follow the meeting, keep an eye on Trump’s Twitter account that will likely
reveal the outcome. A positive outcome will remove one of the biggest obstacles
preventing risk taking.
Brexit Plan B
Sterling has rallied
significantly over the past several days on optimism that a no-deal scenario
will be averted. The “Plan B” which might look a lot like “Plan A” will be
debated in Parliament on 29 January, and maybe voted on later on the same day.
Labour leader Jeremy Corbyn has refused to participate in talks that do not
take the ‘no deal’ scenario off the table. While Mrs. May is not likely to
include such an amendment, the most realistic outcome is to seek an extension
for Article 50.
US Earnings
It’s going to be a busy week on
the earnings front with Apple, Facebook, Microsoft, Amazon, Tesla and many
other tech and industrial firms releasing their Q4 results. The tech sector
which makes up more than a quarter of the S&P 500 market cap will likely determine
the US equities direction.
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