Financial market research and analysis

Asian markets trade mixed overnight after Wall Street ended lower. European and US futures are pointing to a cautiously higher start on the open. After a wild ride over the past 10-day investors are sitting tight. A lull in news about the ongoing trade dispute, economic stimulus and recession has investors pausing for breath ahead of today’s release of minutes from the July FOMC meeting, Thursday’s pmi data and most importantly Federal Reserve Jerome Powell’s speech at Jackson Hole, Wyoming on Friday. Investors will be keen to see whether he will stick to his guns on the “mid cycle adjustment” or whether he will promise the market something more.

The next move by the market depends greatly on what the Fed will do with interest rates. Given the current climate, the markets are ultra sensitive to the Fed’s outlook meaning that the FOMC minutes could be scrutinised more closely than usual. The market is fully pricing in a 25-basis point rate cut for the September meeting and a 50 point basis rate cut by the end of the year.

FOMC minutes to boost dollar?

The FOMC minutes are from the meeting in July. Investors will be looking for acknowledgement that downside risks have increased. However, importantly, the FOMC meeting was prior to the most recent escalation in US – Sino trade dispute and prior to the bond market flashing strong recession warning signals. With this is mind, the minutes could be slightly more hawkish relative to current market pricing. As a result, the dollar could move higher and stocks lower following their release.

Italian Political Instability

Political turmoil in Hong Kong, Britain and Italy will remain on traders’ radars. In Italy the resignation of Italian PM Giuseppe Conte saw bond yields dive over 5% across the previous session, whilst the FTSE MIB took a 1% hit. Banks stocks, which dropped some 3% will remain in focus given their sensitivity to political instability in the country.

An election is not a done deal, the prospect of another coalition still exists. However, investors are nervous of an Autumn election which would interrupt negotiations with the EU over the fiscal budget. Last years negotiations were fraught, given Italy’s desire to spend heavily despite its high debt pile. This years’ negotiation isn’t shaping up to be any better and could be significantly worse if populist and League leader Matteo Salvini is at the helm.