A tumultuous year for financial markets is entering the home straight, with Britain battling a self-inflicted crisis and markets pouring over U.S. jobs data to determine how much of an impact Fed hikes are having on the U.S. economy.
Currencies plumbing multiyear lows in Australia and New Zealand are ramping up pressure on policy makers there, and Brazil’s voters head to the ballot box in a continent in political flux.
Here’s a look at the week ahead in markets:
KAMI-KWASI?
Britain's Chancellor of the Exchequer Kwasi Kwarteng walks outside Downing Street in London on Sept. 23.MAJA SMIEJKOWSKA/Reuters
When Britain’s new Finance Minister Kwasi Kwarteng speaks at his Conservative Party’s annual conference, which kicked off Sunday, it’s not just the party faithful that will tune in.
Britain is at the centre of an economic firestorm, triggered by Mr. Kwarteng’s Sept. 23 fiscal plan that spooked markets with its unfunded tax cuts. Sterling hit record lows, and surging bond yields forced the Bank of England to intervene to stem a market rout.
The BoE’s pledge to buy US$69-billion of long-dated gilts has calmed markets for now, but it’s too soon to say the rout is over. And buying bonds at a time when the BoE is hiking rates to contain inflation could hurt its credibility.
The IMF, among others, has weighed in on events in Britain and their effect globally. That leaves the spotlight firmly on Mr. Kwarteng.
LABOUR OF LOVE
Ford Assembly workers Anthony Chwalek, left, and Tom Downs install a battery charger underneath a Ford Focus Electric vehicle at the Michigan Assembly Plant in Wayne, Michigan Nov. 7, 2012.Rebecca Cook/Reuters
U.S. jobs data on Oct. 7 will show whether the Fed’s rate-hike barrage is finally having an effect.
Past employment data suggested the economy was humming along despite several jumbo sized rate increases — evidence usually corroborated by strong inflation readings a few weeks later.
Another such report for September could help bolster the case for even more hawkishness from the world’s top central bank, potentially roiling markets already bruised by worries over how high rates could soar in a bid to tame the worst inflation in forty years. Conversely, signs of rapidly deteriorating jobs growth could fuel worries that aggressive Fed tightening is pushing the economy toward a recession.
Economists polled by Reuters expect the United States to have created 250,000 jobs last month.
DROPPING DOWN UNDER
A worker is reflected in a wall of the Reserve Bank of Australia (RBA) head office in central Sydney, Australia, March 1, 2016.David Gray/Reuters
The free fall in antipodean currencies to multiyear lows is piling pressure on central banks to deliver tighter policy.
For Australia’s Reserve Bank, bets are 50-50 for a half-point or quarter-point hike on Tuesday. Traders fully price another half-point rate increase by the Reserve Bank of New Zealand on Wednesday and lay 1-in-5 odds on a 75-basis-point bump.
New Zealand was first out of the gate among developed markets a year ago, while Australia has delivered one of the most aggressive campaigns in its history.
But accelerating policy tightening elsewhere, particularly in the United States, has cut into the yield advantage. With the Aussie and Kiwi both hypersensitive to swings in risk sentiment, policy makers may have little ability to arrest the slide.
THE BOYS FROM BRAZIL
,Brazilian presidential candidate for the leftist Workers Party (PT) and former president Luiz Inacio Lula da Silva, delivers a speech during a campaign rally in Taboao da Serra, Sao Paulo, Brazil on Sept. 10.MIGUEL SCHINCARIOL/AFP/Getty Images
Leftist former union leader Luiz Inacio Lula da Silva is on track to replace Brazil’s right-wing President, Jair Bolsonaro, and looks ready to tear up the most important fiscal rule in the world’s 10th largest economy. Some polls indicate Mr. Lula da Silva might get more than 50 per cent, clinching a first-round victory.
Markets seem largely unfazed by Sunday’s highly polarized election, with an even-keeled outlook for Brazil, where the local currency and stock market have rallied this year in a sign of confidence the vote won’t ruin the relative haven of Latin America’s largest economy.
But politics can be febrile in the region. An assassination attempt in Argentina and spurts of election-linked violence in Brazil are the latest signs of growing political strife. Investors are looking for a calm transition as Mr. Bolsonaro lays the groundwork to contest a defeat, but Brazil’s institutions have closed ranks to guarantee the integrity of the vote.
BUCKLE UP
People walk by the New York Stock Exchange (NYSE) on Sept. 29.Spencer Platt/Getty Images
The past few months have rained yet more pain down on financial markets, meaning this year is firmly on course to be the most painful ever for anyone lucky enough not to have experienced the Second World War, unless they had all their chips on king dollar.
Free and easy central banks have morphed into inflation-fighting machines. Another 5 per cent has been lopped off world stocks since June, oil has slumped more than 20 per cent and Japan and Britain have both had been forced into currency or bond interventions.
Whether the next few months will be any better is no easy call. While there are some signs global inflation might be peaking, major central banks look stuck on the rate-hike hamster wheel. Geopolitics will continue to be high on the agenda, with China’s Communist Party Congress getting under way in October, while Russia’s nuclear threats and annexation of Ukraine’s territory have marked the start of a new phase in the seven-month old conflict.
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