Will the range bound trading continue in the week ahead?

Last week the financial markets experienced very low volatility in equities, fixed income, and currency exchanges. The S&P 500 moved within a 23 points trading range. Similarly, the U.S. 10-year Treasury bonds were stuck in a six basis points trading range, and FX markets were incredibly boring for many traders.

Although oil fell into a bear market, equities were slightly impacted. This is probably due to the lower weight the energy sector represents now compared to 2014. However, if the slump in oil resumes, I think it will threaten other sectors, particularly the financials, as lower oil prices mean lower inflationary pressures and lower interest rates across developed economies, which will eventually lead to compressed profit margins for banks.

The Fed policymakers had been broadly hawkish last week, and most of them anticipate another rate hike in 2017 (most likely in December). However, fixed income markets are saying it's over for this year as they don’t see inflationary pressures coming anytime soon. It’s still too far from December, but oil prices will play a significant role on how interest rates go from here. 

With valuations still high and the timetable for President Donald Trump’s fiscal policies being unpredictable, only robust earnings can support stocks. According to FactSet, the estimated earnings growth for S&P 500 is 6.6%, down from 8.7% forecast in March. Given the negative surprises in recent U.S. economic data, we might also see estimates dragged lower. Thus, bulls and bears will be cautious at this stage leading to the continuation of sideway movements in major U.S. indices. 

In currency markets, the Cable will be under the spotlight. Queen Elizabeth gave approximately a one-week deadline for the vote in the House of Commons. Prime Minister Theresa May needs to strike a deal with the Democratic Unionist Party to prevent her government from falling apart. I believe there’s a high chance that she will get a deal, but if she failed to do so, GBP/USD would likely experience another fall towards 1.25, however, if she were to be successful, l expect to see a further recovery towards 1.29. There’s very little on U.K.’s data front, so politics will be the primary driver of the Pound.

Another interesting currency to trade is the Loonie. Despite falling oil prices, the Canadian dollar was the top performing currency past week on prospects of higher interest rates. Monetary policymakers shifted their tone to prepare markets for a rate hike. Inflation rate doesn’t support their argument as it declined to 1.3%, but with other economic data remaining robust, they will keep sending hawkish signals. Governor Poloz, will be joined by ECB’s Mario Draghi, BoJ’s Haruhiko Kuroda, and BoE’s Mark Carney on a panel discussion on Wednesday, which will likely shed some light on central bankers’ thoughts. 

About the Author

Hussein Sayed is chief market strategist at FXTM.